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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER: 0-2572
STEEL CITY PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 55-0437067
STATE OR OTHER JURISDICTION OF I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION NUMBER
200 CENTER STREET
McKEESPORT, PENNSYLVANIA 15132
ADDRESS OF PRINCIPAL EXECUTIVE OFFICES ZIP CODE
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (412) 896-7271
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
-------------------
COMMON STOCK, $0.01 PAR VALUE PER SHARE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K [X]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED BY EXCHANGE ACT RULE 12b-2). [ ] YES [X] NO
AGGREGATE MARKET VALUE AT MARCH 1, 2003 OF THE VOTING STOCK HELD BY
NON-AFFILIATES OF THE REGISTRANT: $57,345
AT MARCH 1, 2003, THE REGISTRANT HAD 3,238,061 SHARES OF COMMON STOCK
OUTSTANDING
DOCUMENTS INCORPORATED BY REFERENCE
None
1
PART I
ITEM 1. BUSINESS
BACKGROUND OF STEEL CITY PRODUCTS, INC.
Steel City Products, Inc. ("SCPI" or the "Company") was incorporated in
West Virginia in 1959, and in 1963 became known as Heck's, Inc. Prior to 1990,
Heck's, Inc. operated a Retail Division consisting of a chain of discount
department stores. In September 1990, all of the assets of the Retail Division
were sold to Retail Acquisition Corp. ("RAC").
The Company was reincorporated in Delaware under the name Hallwood
Industries Incorporated in 1990, and in January 1993 the Company changed its
name to Steel City Products, Inc.
The Steel City Products automotive distribution business was founded in
1947 and was acquired in 1969. All operations of SCPI are conducted under the
name Steel City Products. In fiscal 1996, SCPI established a division to
distribute non-food pet supplies. In fiscal 2000, SCPI broadened its
distribution business to include lawn and garden products.
FORMATION OF STERLING CONSTRUCTION COMPANY, INC. ("STERLING"), FORMERLY OAKHURST
COMPANY, INC.
Oakhurst was formed as part of a merger transaction in 1991, in which
SCPI became a majority-owned subsidiary. In accordance with the merger
agreement, Oakhurst owns 10% of the outstanding SCPI common stock and all of the
SCPI Series A Preferred Stock. In July 2001, Oakhurst completed a transaction in
which it acquired an 80.1% equity interest in Sterling Construction Company, a
heavy civil construction company based in Houston that specializes in municipal
and state highway contracts for paving, bridge, water and sewer, and light rail.
To better reflect the change of focus of the company, in October 2001, the
shareholders of Oakhurst approved a name change to Sterling Construction
Company, Inc and the company formerly bearing that name was renamed Sterling
Houston Holdings, Inc. ("SHH").
On November 1, 2001, the Board of Directors of the Company voted to
change the Company's fiscal year end from the last day of February to December
31. Accordingly, this report covers the fiscal year from January 1, 2002 through
December 31, 2002 ("Fiscal 2002"). The prior reporting period covers the
ten-month transition period from March 1, 2001 to December 31, 2001 ("Fiscal
2001"). Information about prior fiscal years is referred to as "Fiscal 2000"
(twelve months ended February 28, 2001), "Fiscal 1999" (twelve months ended
February 29, 2000) and "Fiscal 1998" (twelve months ended February 28, 1999).
Because Sterling's ownership of SCPI is primarily in the form of
preferred stock, Sterling retains most of the value of SCPI. The structure of
Sterling's ownership of SCPI facilitates the preservation and utilization of
SCPI's and Sterling's net operating tax loss carry-forwards, which aggregated
approximately $110 million at December 31, 2002.
OPERATIONS
For many years SCPI distributed only automotive accessories, including
functional and decorative car and truck accessories (such as floor mats, seat
covers, mirrors, running boards, lights and wheel covers), car care products
(including waxes and paints), chemicals (such as antifreeze, windshield washer
fluid and motor oil) and car repair and maintenance items (including spark
plugs, windshield wipers, and air and oil filters). Starting in fiscal 1996,
SCPI expanded its merchandise selection to include, firstly, non-food pet
supplies, and, secondly, in fiscal 2000, lawn and garden products. Although
these products were not typical of SCPI's historical merchandise mix, management
determined that the availability of existing customers which sell pet supplies
and lawn and garden products in addition to automotive accessories, combined
with SCPI's distribution expertise and infrastructure, offered opportunities to
increase sales. Sales in fiscal 2002 of pet supplies and lawn and garden
products
2
represented approximately 21% and 11%, respectively, of SCPI's total sales.
SCPI's automotive and pet operations are conducted in leased facilities in
McKeesport, Pennsylvania and its lawn and garden operations are conducted in
leased facilities in Glassport, Pennsylvania.
Historically, much of SCPI's business has been performed on a service
basis, which involves visits by its sales personnel to customers' stores to
count and re-order merchandise; generally, these re-orders are transmitted
electronically to SCPI's central offices. In recent years a growing proportion
of its customers electronically transmit their own orders to SCPI's
headquarters. Since many orders are generated electronically and are shipped
within a few days of receipt, the size of SCPI's order backlog is not relevant
to an understanding of the business. Shipments are either made directly to each
of the customers' stores or are pre-packed for onward shipment to stores via the
retailers' own distribution centers. SCPI also provides price ticketing and
associated services to those of its customers who request such services.
Sources of Supply
SCPI acquires its merchandise from a large number of suppliers, the
largest of which accounted for 13.5% of its purchases for the fiscal year ended
December 31, 2002. Many of the products sold by SCPI carry nationally-advertised
brand names, but because of the diversity and number of suppliers and products
carried, the business is not generally dependent on the continued availability
of individual products or continued dealings with existing supply sources. From
time to time, market or seasonal conditions may affect the availability of
certain merchandise, but not to the extent that the Company believes would
materially impact its business.
SCPI generally carries in inventory only those products that its
customers have identified as necessary for their own merchandising needs, and
does not acquire significant quantities of other merchandise.
Seasonality
SCPI's automotive and lawn and garden businesses are seasonal, being
slowest in the early winter months than at other times of the year. In
anticipation of higher sales volume in the spring and summer, SCPI carries
higher inventories of these products beginning in the winter months. As is
customary in the automotive aftermarket and in the lawn and garden business,
some suppliers allow extended payment terms to SCPI for such inventory
build-ups.
SCPI's pet supply business experiences different seasonal trends from
its automotive and lawn and garden businesses, but the effect of this is not
material to the overall business.
SCPI's needs for working capital are affected by these seasonal
fluctuations (see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources").
Customer Base
SCPI's customers include supermarket chains, drug stores, general
merchandise retail chains, automotive specialty stores, hardware stores, variety
stores and other automotive accessory distributors. Most customers are based in
the northeastern United States, although stores operated by some customers are
located outside of that area. Since February 2000 SCPI has supplied the west
coast distribution facility of one of its major customers. There are no foreign
sales.
SCPI's customers are continually affected by changes in the retail
environment, including the competitive pressures facing regional mass
merchandisers and the growing influence of national automotive specialty chains.
These have led to fluctuations in the level of business that SCPI enjoys with
individual customers. Some customers have changed their buying practices to
acquire certain merchandise direct from manufacturers rather than through
distributors such as SCPI.
3
In its efforts to offset these trends, SCPI has in recent years added
new customers, especially in the supermarket and drug store sectors, has
expanded its product offerings to certain customers, has enlarged the territory
that it serves and has introduced new categories of products. Management
believes that these efforts have resulted in a more diverse and financially
secure customer base. However, in August 2001 SCPI's largest remaining discount
chain customer, Ames Department Stores ("Ames"), filed for Chapter 11 bankruptcy
protection and in July 2002, liquidated its remaining business.
Sales for the fiscal year ended December 31, 2002 totaled $22.6
million, compared with $20.9 million in the same twelve-month period of the
prior year.
The following table shows sales to SCPI's customers that individually
accounted for more than 10% of sales during any of the latest three fiscal years
(dollars in thousands):
Fiscal Year 2002 Ended Fiscal Year 2001 Ended Fiscal Year 2000 Ended
December 31, 2002 December 31, 2001 February 28, 2001
----------------- ----------------- -----------------
(ten months)
Sales % of Sales Sales % of Sales Sales % of Sales
Warehouse Sales $3,711 16% $2,193 13% * *
Kroger $3,591 16% $2,758 16% $2,057 10%
Ames $2,918 13% $3,217 18% $3,746 18%
Giant Eagle $2,959 13% $2,313 13% $2,055 10%
American Sales * * $1,863 11% * *
*represents less than 10% of sales
In August 2001, Ames filed for Chapter 11 protection. SCPI continued to
ship to Ames as debtor-in-possession under strict payment terms. Pre-petition
sales to Ames during fiscal 2001 (mostly of automotive products) totaled $1.5
million, of which approximately $680,000 was unpaid at the time of Ames
bankruptcy filing. Sales to Ames in fiscal 2002 prior to its liquidation in
July, aggregated $2.9 million, with the increase primarily attributable to sales
of pet supplies.
SCPI's five largest customers accounted for approximately two-thirds of
its total revenues in fiscal 2002. Management has no reason to believe that its
business with any of these customers will be terminated in the foreseeable
future, as evidenced by the continuing increases in sales to each of them except
Ames. In the event that one of its largest customers ceased doing business with
SCPI, the resulting reduction in revenues could significantly reduce
profitability, unless a replacement customer was identified.
None of SCPI's business is based on government contracts, and there are
no long-term sales contracts with any customers.
Competition
SCPI's distribution lines of automotive parts and accessories, non-food
pet supplies and lawn and garden products are highly competitive, with several
similar companies operating in SCPI's market place, and many of SCPI's suppliers
also offer their products directly to retailers. Management is unable to
quantify SCPI's relative size in the distribution industry or in relation to its
competitors but believes it is one of the larger independent distributors of
automotive accessories in the Northeastern United States. In recent years, a
number of significant automotive competitors of SCPI have gone out of business
and some of SCPI's customers have chosen to purchase some products directly from
manufacturers. SCPI competes on the basis of its management's merchandise
expertise, the breadth of merchandise offered, prices, level of service, order
fill rates and order turnaround times. Management believes that SCPI's long
history, good reputation, experienced management, product selection, pricing,
service levels and traditionally high order fill rates enable it to compete
favorably with other distributors and with direct shipment by manufacturers.
4
Regulation
SCPI's management does not anticipate that existing or known pending
environmental legislation or other regulations will require major capital
expenditures or will adversely affect its operations.
Employees
SCPI employs approximately 50 persons, of which about 40 are employed
in the headquarters office and distribution facilities in McKeesport and
Glassport. Most of the others are field personnel. Senior executives, including
the Chairman, Bernard H. Frank (a founder of Steel City Products in 1947), the
President and Chief Executive Officer, Terrance Allan, and the Vice President of
Sales, Patrick Nicholson, have many years of service with SCPI. Mr. Allan is
employed under a long-term contract.
Warehouse and certain office employees of SCPI are represented by Local
636 of the International Brotherhood of Teamsters. SCPI believes that it has
experienced generally good labor relations, and no significant labor disputes
have affected its business in recent years. The union contract was renewed for a
three-year term through November 2002 and was extended after November 2002 while
renewal negotiations continued.
ITEM 2. PROPERTIES
SCPI has operated its business from a leased, 67,000 square-foot
building located in an industrial park in McKeesport, Pennsylvania since
December 1997 when its former warehouse in Pittsburgh was sold. With additional
business generated from the distribution of lawn and garden products, SCPI
entered into a lease agreement for approximately 43,000 square feet of
additional warehouse space in Glassport, Pennsylvania in December 2000.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company or
to which the Company is a party or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
final three months of the fiscal year ended December 31, 2002.
5
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As a result of the merger transaction with Sterling (then Oakhurst
Company, Inc.) in fiscal 1992 (see Item 1, "Business - Formation of Oakhurst
Company, Inc."), most of the Company's value is vested in Sterling. As a result
of the merger, the Company's stock price fell below the NASDAQ minimum bid price
of $1.00 per share and on July 14, 1992 the Company's common stock was removed
from listing by NASDAQ.
The Company's stock trades on the OTC Bulletin Board under the symbol SCTP.
The following table sets forth the high and low bid price for the Company's
stock for the last two fiscal years.
Fiscal 2002 Fiscal 2001
Quarterly High Quarterly Low Quarterly High Quarterly Low
-------------- ------------- -------------- -------------
Quarter 1 $0.02 $0.01 $0.06 $0.04
Quarter 2 $0.05 $0.01 $0.10 $0.02
Quarter 3 $0.07 $0.01 $0.03 $0.01
Quarter 4 $0.04 $0.01 $0.02 $0.01
Such quotations reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
No common stock dividends were paid by SCPI during fiscal 2002, 2001 or
2000. Dividend payments are restricted by the covenants under the Company's line
of credit agreement.
Through its ownership of SCPI, primarily in the form of Series A
Preferred Stock, Sterling controls the Company and receives substantially all of
the benefit of the Company's operations through the right to receive preferred
stock dividends, which are required to be paid before any common stock dividends
may be paid.
There were approximately 3,800 holders of record of SCPI's common stock
on March 1, 2003.
6
ITEM 6. SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial and other data of
Steel City Products, Inc. and should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations, which
follows, and with the Financial Statements and related Notes.
Fiscal 2001
Fiscal 2002 December 31, Fiscal 2000 Fiscal 1999 Fiscal 1998
December 31, 2001(d) February 28, February 29, February 28,
2002 (ten months) 2001 2000 1999
----------- ------------ ----------- ----------- ------------
(Dollar amounts in thousands, except per share data)
OPERATING RESULTS:
Sales................................ $ 22,570 $ 17,467 $ 20,694 $ 20,142 $ 18,092
=========== ============ ============ ============ ==============
Income (loss) before income taxes(e). $ 505 $ (192) $ 581 $ 333 $ 161
Current income tax expense........... 14 14 27 10 8
Deferred income tax expense (benefit)
(b)........................ 73 (800) - - -
----------- ------------ ------------ ------------ --------------
Net income........................... 418 594 554 323 153
Series A Preferred Stock dividends(a) (1,014) (850) (1,014) (1,014) (1,014)
----------- ------------ ------------ ------------ --------------
Net loss attributable to common
stockholders......................... $ (596) $ (256) $ (460) $ (691) $ (861)
=========== ============ ============ ============ ==============
BASIC AND DILUTED PER SHARE AMOUNTS:
Net loss attributable to common
stockholders......................... $ (0.18) $ (0.08) $ (0.14) $ (0.21) $ (0.27)
=========== ============ ============ ============ ==============
Cash dividends declared.............. $ (0.00) $ (0.00) $ (0.00) $ (0.00) $ (0.00)
BALANCE SHEET STATISTICS:
Total assets(c)...................... $ 6,906 $ 7,134 $ 7,438 $ 7,910 $ 7,807
Long-term obligations................ $ 3,174 $ 3,135 $ 3,633 $ 3,352 $ 3,029
Series A Preferred Stock face value........ $ 10,135 $ 10,135 $ 10,135 $ 10,135 $ 10,135
(a) The Series A Preferred Stock has a dividend rate of $0.5228 per share
and is redeemable at SCPI's option at $5.2282 per share plus any
cumulative dividends in arrears. Through fiscal 2002, dividends of
approximately $11.5 million have accumulated since the effective date
of the merger; of this amount, approximately $3.6 million were declared
by the Company's Board of Directors prior to fiscal 1996. Approximately
$7.9 million of undeclared dividends in arrears are outstanding at
December 31, 2002.
(b) In December 2001, SCPI recognized a deferred tax asset of $800,000.
(See Note 7 to the Financial Statements). In fiscal 2002, SCPI
increased its provision by $73,000.
(c) Advances made to Sterling with a balance of $9.9 million at December
31, 2002 are classified as a component of stockholders' equity. The
above data for periods prior to fiscal 2001 have been revised to
reflect a similar treatment as of each respective balance sheet date.
(d) In November 2001, the Board of Directors voted to change the Company's
fiscal year end to December 31. Results for the transition period
include the ten months from March 1, 2001 to December 31, 2001.
(e) The loss before income taxes for the ten months ended December 31, 2001
included bad debt expense of $469,000 related to the bankruptcy filing
of Ames, a significant customer of SCPI, in August 2001. In fiscal
2002, bad debt expense related to the liquidation of the Ames' business
totaled approximately $170,000.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
SCPI is a special, limited purpose, majority-owned subsidiary of
Sterling. Through Sterling's ownership of SCPI, primarily in the form of
preferred stock, Sterling retains substantially all the value of SCPI, and
receives substantially all of the benefit of operations through its entitlement
to dividends on the preferred stock. Sterling's ownership of SCPI is designed to
facilitate the preservation and utilization of SCPI's and Sterling's net
operating tax loss carry-forwards that amount to approximately $110 million at
December 31, 2002.
Until fiscal 2000, SCPI distributed automotive accessories and non-food
pet products. In fiscal 2000, SCPI began the distribution of lawn and garden
supplies. SCPI utilizes three operating segments, Auto, Pet and Lawn. The
allocation of financial resources is determined by SCPI's President and Chief
Executive Officer, Terrance Allan, and its Chief Financial Officer, Maarten
Hemsley, who assess resources based on the operating profitability and working
capital needs of each segment.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Management's estimates, judgments and
assumptions are continually evaluated based on available information and
experience, however actual amounts could differ from those estimates. The
Company's significant accounting policies are described in Note 1 of the Notes
to Consolidated Financial Statements.
Revenue Recognition: Revenues are recognized when all of the
following criteria are met:
- There is persuasive evidence that an arrangement
exists
- Shipment has occurred
- The sales price to the buyer is fixed and
determinable, and
- Collectibility is reasonably assured.
Accounts Receivable Allowance: Credit is extended based on an
evaluation of a customers' financial condition. Accounts receivable are normally
due within 30 days, however the Company does provide certain of its customers
with extended terms at certain times. The Company determines its allowance for
doubtful accounts by considering a number of factors, including the length of
time trade receivables are past due, the Company's previous loss history, the
customer's current ability to pay its obligation to the Company and the general
economic condition of the country and the industry as a whole.
Deferred Taxes: Deferred tax assets and liabilities are recognized
based on the differences between the financial statement carrying amounts and
tax bases of assets and liabilities. The Company regularly reviews its deferred
tax assets for recoverability and establishes a valuation allowance based upon
historical losses, projected future taxable income and the expected timing of
the reversals of existing temporary differences. As a result of this review and
the SHH acquisition by Sterling, the Company reduced the valuation allowance
against the deferred tax asset related to the estimated utilization of the net
operating losses.
LIQUIDITY AND CAPITAL RESOURCES
In addition to cash derived from operations, SCPI's liquidity and
financing requirements are determined principally by the working capital needed
to support its level of business, together with the need for capital
expenditures and the cash required to repay its debt. SCPI's working capital
needs fluctuate primarily in relation to the amounts of inventory it carries
that can change seasonally, the size and timeliness of payment of receivables
from its customers, and the amount of credit extended to SCPI by its suppliers.
8
Management does not believe that inflation has had a material negative
impact on the Company's operations or financial results during recent years.
FINANCING AND LINE OF CREDIT
In March 1996, Sterling and its subsidiaries (including SCPI) obtained
financing from an institutional lender (the "Credit Facility"). The Credit
Facility initially provided for a revolving credit agreement and a term loan on
SCPI's warehouse facility. The term loan was repaid in fiscal 1998 upon SCPI's
sale of its warehouse. Over time, the revolving credit agreement was amended to
provide for the sale or disposition of certain of Sterling's subsidiaries,
reduce the maximum credit line and amend certain financial covenants.
Due to concerns stemming from the institutional lender's filing for
bankruptcy, SCPI obtained a replacement bank line of credit in July 2001. This
new revolving bank line (the "Revolver") was for a term of two years in the
amount of $4.5 million, subject to a borrowing base. The Revolver initially
carried an interest rate equal to prime plus 1%. Following the bankruptcy filing
of Ames in August 2001, the Revolver was amended to shorten the term of the line
and increase the interest rate to prime plus 1.5%. Upon satisfaction to the
lender of SCPI's ability to obtain new customers and maintain sales levels and
profitability, the Revolver was again amended in December 2001 to provide for a
line of $5.0 million, subject to a borrowing base, and to extend the term to May
31, 2003. In fiscal 2002, the Revolver was further amended to extend the term to
May 31, 2004 and to remove a borrowing restriction on inventory. At December 31,
2002, the outstanding balance on the Revolver was $2.6 million.
In October 1998, SCPI obtained a loan from the Redevelopment Authority
of the City of McKeesport (the "Subordinated Loan") that is subordinated to the
Revolver, in the amount of $98,000 carrying interest at the rate of 5% per
annum. The loan was used to fund leasehold improvements and is being repaid in
monthly installments through October 2003. The balance outstanding on the loan
at December 31, 2002 was approximately $18,000.
The Company acquired certain warehouse and computer equipment under
capital leases, usually with five-year lease terms, with expirations ranging
from September 2003 through October 2007. Equipment financed under capital
leases totaled $268,000 at the end of fiscal 2002. Remaining payments under
capital leases totaled $107,000 at December 31, 2002.
In conjunction with the December 2001 amendment to the SCPI Revolver
and in order to strengthen SCPI's working capital position through the purchase
of additional inventory, Sterling funded SCPI $500,000 through a subordinated
promissory note (the "Subordinated Sterling Loan"). The note, which is repayable
in a single installment in December 2004, bears interest at 12% per annum,
payable monthly.
In January 2003, certain members of management of SCPI and Sterling and
its subsidiary, Sterling Houston Holdings ("SHH") funded $250,000 to cover
short-term working capital needs at SCPI. The notes bear interest at 10%, are
subordinated to the Revolver and are payable in July 2003, provided covenants
under the Revolver are met.
Management believes that the Revolver and the Subordinated Sterling
Loan will provide adequate funding for SCPI's working capital, debt service and
capital expenditure requirements, including seasonal fluctuations for at least
the next twelve months, assuming no material deterioration in current sales or
profit margins.
TAX LOSS CARRY-FORWARDS
At December 31, 2002, SCPI and Sterling had net operating tax loss
carry-forwards (the "Tax Benefits") aggregating approximately $110 million,
which expire in the years 2003 through 2021, which will shelter most of SCPI's
income from federal income taxes. A change in control of SCPI or Sterling
exceeding 50% in any three-year period may lead to the loss of the majority of
the Tax Benefits. In order to reduce the likelihood of such a change of control
occurring, SCPI's and Sterling's Certificates of Incorporation include
restrictions on the registration of transfers of stock resulting in, or
increasing, individual holdings exceeding 4.5% of each company's common stock.
9
Since the regulations governing the Tax Benefits are highly complex and
may be changed from time to time, and since SCPI's and Sterling's attempts to
reduce the likelihood of a change of control occurring may not be successful,
management is unable to determine the likelihood of the continued availability
of the Tax Benefits. However, management believes that the Tax Benefits are
currently available in full and intends to take all appropriate steps to help
ensure that they remain available. Should the Tax Benefits become unavailable to
SCPI or Sterling, most future income of SCPI and any consolidated affiliate
would not be shielded from federal taxation, thus reducing funds otherwise
available for corporate purposes (see Note 7 to the financial statements). The
Company considers its accounting for income taxes a critical accounting policy.
In December 2001, management determined that it was more likely than
not that the Company will continue to operate profitably. Previously, the
consolidated group that includes SCPI and Sterling was not profitable and
therefore the ability to utilize the net operating loss carryforwards was
restricted. It is expected that the consolidated tax return of the group will
show substantial taxable income. Therefore, management determined that the
future operations of SCPI warranted a decrease in the valuation allowance so
that SCPI recorded a net deferred tax asset of $800,000 in the transitional
period ended December 31, 2001. A reassessment of the deferred tax asset in
fiscal 2002 resulted in a decrease in the net asset of $73,000.
CASH FLOWS
Net cash provided by operating activities in fiscal 2002 decreased by
approximately $443,000 from fiscal 2001. Cash decreased in the current year due
to higher levels of accounts receivable and lower accounts payable, which were
somewhat offset by lower inventory levels. In fiscal 2001, cash provided by
operations increased by approximately $538,000 compared with fiscal 2000. Cash
was generated in fiscal 2001 due to lower levels of accounts receivable and
inventory combined with slightly higher levels of accounts payable.
Cash used in investing activities increased in fiscal 2002 by $40,000
due to capital expenditures made for computer and leasehold equipment. In fiscal
2001, cash used in investing activities decreased by $26,000 due to fewer
purchases of equipment compared with fiscal 2000.
In fiscal 2002, the Company's financing activities used cash of
$573,000, a decrease of approximately $336,000 compared with fiscal 2001. The
decrease was primarily due to repayments on the line of credit in the prior
year, offset by higher increases in advances to Sterling of $234,000. In fiscal
2001, the Company's financing activities used cash of $909,000, an increase of
$460,000 compared with fiscal 2000. The increase was due principally to a
reduction in the line of credit balance in fiscal 2001 and to advances to
Sterling. These increases were offset in part by the advance of $500,000 from
Sterling pursuant to the Subordinated Sterling Loan.
STOCKHOLDERS' DEFICIENCY
Through December 31, 2002, the Company had not declared or paid Series
A Preferred Stock dividends totaling approximately $7.9 million, for the period
from August 1994. Any such dividends would be payable to Sterling. Dividends
declared and paid in earlier years were used by Sterling in reduction of
intercompany debt owed by Sterling to the Company. Accordingly, if such
dividends were declared and paid by the Company, the effect would be a decrease
in the intercompany loans owed by Sterling to the Company to approximately $2.0
million.
As a result of the Sterling Transaction completed in July 2001,
Sterling has significant positive net worth arising from its investment in
Sterling Houston Holdings ("SHH"), but covenants under SHH's bank facility
currently limit upstreaming of operating cash flow by SHH to Sterling, so that
Sterling is not currently able to fund any repayment of loans owed by it to the
Company. Accordingly, Sterling and the Company have not agreed repayment terms
for such loans, and generally accepted accounting principles require the Company
to record advances to Sterling as a component of stockholders' equity (thereby
creating a deficiency) until such time as formal repayment terms are agreed.
10
If outstanding Series A Preferred dividends at December 31, 2002 had
been declared and paid to Sterling and applied in reduction of the intercompany
loan, and payment terms on the balance of such loan had been agreed, the effect
would have been to reclassify the remaining loan amount of approximately $2.0
million as an asset, rather than a reduction in stockholders' equity, with the
result that the Company's stockholders' equity would have been reported at a
positive level of approximately $1.0 million.
FORWARD LOOKING STATEMENTS
From time to time the information provided by the Company or statements
made by its directors, officers or employees may contain so-called "forward
looking" information that involves risks and uncertainties. In particular,
statements contained in Item 1 - "Business" and in this Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations," which
are not historical facts (including, but not limited to statements concerning
anticipated sales, profit levels, customers, cash flows and availability of
financing) are forward looking statements. The Company's actual future results
may differ significantly from those stated in any forward looking statements.
Factors that may cause such differences include, but are not limited to the
factors discussed above as well as the accuracy of the Company's internal
estimates of revenue and operating expense levels. Each of these factors and
others are discussed from time to time in the Company's Securities and Exchange
Commission filings.
CERTIFICATION
This Annual Report on Form 10-K has been certified by Terrance W.
Allan, Chief Executive Officer of the Company and by Maarten D. Hemsley, Chief
Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Subsections (a) and (b) of section 1350, chapter 63 of title 18,
United States Code) and is attached as Exhibit 99.1.
RESULTS OF OPERATIONS
Results of operations include the results of SCPI's operating division,
Steel City Products, a distributor of automotive parts and accessories, non-food
pet supplies and lawn and garden products, based in McKeesport, Pennsylvania.
Fiscal Year Ended December 31, 2002 Compared with Fiscal Year Ended December 31,
2001 (ten months)
Automotive segment
Sales of automotive accessories totaled $15.3 million in the fiscal
year ended December 31, 2002, compared with $13.6 million for the ten months
ended December 31, 2001, an increase of $1.7 million, largely attributable to
the longer reporting period. Sales to existing customers increased by $2.8
million, offset by a decrease in sales to Ames, which filed for bankruptcy
protection in August 2001 and which liquidated in July 2002. Sales to new
customers totaled approximately $198,000 in fiscal 2002.
Gross profits increased by approximately $439,000, due to the longer
reporting period, which produced higher sales, combined with better margins on
certain product lines.
The automotive segment reported an operating profit of $280,000 in
fiscal 2002, compared with an operating loss in fiscal 2001 of approximately
$21,000. The improvement was due principally to a significant charge to bad debt
expense in the prior year resulting from the Ames Chapter 11 filing.
11
Pet supplies segment
In fiscal 2002, sales of pet supplies totaled $4.8 million, an increase
of $1.8 million compared with fiscal 2001, which included ten months. The
increase was largely due to sales to Ames as debtor-in-possession until it
liquidated its business in July 2002, and to increased sales to other existing
customers due in part to the longer reporting period.
Gross profit increased by $398,000 resulting from the higher sales
levels.
Operating profit in the pet supplies segment increased by $367,000 in
fiscal 2002, due to the higher sales levels, offset by approximately $32,000 of
bad debt expense related to Ames.
Lawn and garden segment
For the fiscal year ended December 31, 2002, sales of lawn and garden
products totaled $2.5 million, an increase of $1.6 million compared with the
prior fiscal period, which contained ten months. The increase was principally
due to additional sales to existing customers, and new customers added
approximately $168,000 in sales.
Gross profit in the lawn and garden segment totaled $141,000, or 5.7%
of sales, an increase of $187,000 from the prior fiscal period. The increase was
due to the higher sales level offset by lower margins on certain products and to
increases in occupancy and warehouse expenses.
The lawn and garden segment reported an operating profit of $95,000
compared with an operating loss of $55,000 in the prior fiscal period, which was
its first meaningful period of operations.
Results for the Fiscal Year Ended December 31, 2002 (Fiscal 2002) Compared with
the Twelve Months Ended December 31, 2001 (unaudited)
As Fiscal 2001 was a short fiscal period due to the change in fiscal years,
the following discussion compares Fiscal 2002 with the comparable unaudited 12
month period in the prior year.
Automotive Pet Lawn & Garden
---------- --- -------------
(in thousands) December 31, December 31, December 31, December 31, December 31, December 31,
2002 2001 2002 2001 2002 2001
Sales $ 15,306 $ 16,227 $ 4,784 $ 3,464 $ 2,480 $ 1,213
Gross profit $ 2,322 $ 2,105 $ 1,190 $ 920 $ 141 $ (22)
Operating profit $ 312 $ (72) $ 838 $ 554 $ 95 $ (17)
Automotive segment
Sales of automotive accessories in Fiscal 2002 totaled $15.3 million, a
decrease of approximately $920,000 compared with the prior twelve months ended
December 2001. Increased sales to existing customers totaled $1.5 million,
however these increases were offset in total by decreased sales of $2.5 million,
a majority of which were the result of reduced sales to Ames, which filed for
Chapter 11 protection in August 2001 and which liquidated its business in July
2002.
Gross profits increased by approximately $217,000 due to better margins
on certain product lines and to lower occupancy and warehouse expenses.
Operating profit in fiscal 2002 was $312,000, an increase of
approximately $384,000 compared with the prior year, due to better margins,
reduction in selling expenses and to a higher bad debt expense relating to Ames
in the prior year.
Pet supplies segment
Sales of pet supplies increased by $1.3 million in fiscal 2002 compared
with the twelve months ended December 2001, due principally to sales to Ames as
debtor-in-possession prior to the liquidation of Ames' business in July 2002.
12
Gross profits were $1.2 million, or 24.9% of sales, compared with
$920,000, or 26.6% of sales in the prior year. The increase was due to the
higher sales level, offset by lower margins received on certain product lines
and to increases in warehouse-related expenses.
The pet supplies segment reported an operating profit of $838,000,
compared with a profit of $554,000 in the comparable prior year period. The
increase was due to the higher sales level, combined with reductions in selling
and administrative expenses, including savings on brokers' fees.
Lawn and garden segment
Sales of lawn and garden products increased by $1.2 million in fiscal
2002 compared with the twelve months ended December 2001. Increases in sales to
existing customers made up most of the increase, and sales to new customers
totaled approximately $168,000.
Gross profits increased by approximately $163,000, resulting from the
higher sales level and lower warehouse costs, offset in part by reduced margins
on certain product lines.
The lawn and garden segment reported an operating profit of $95,000,
compared with a loss in the prior year of $17,000, which was its first
meaningful period of operations. The increase was due to higher sales, better
margins and reduced expenses.
Fiscal Year Ended December 31, 2001 (ten months) (Fiscal 2001) Compared with
Fiscal Year Ended February 28, 2001 (Fiscal 2000)
Automotive segment
For the ten-month fiscal period ended December 31, 2001, sales of
automotive accessories were $13.6 million, a decrease of approximately $4.0
million compared with fiscal 2000, which included twelve months. Sales to
existing customers decreased by approximately $4.2 million, due largely to the
bankruptcy filing of Ames in August 2001 and to certain customers purchasing
product directly from manufacturers, and to the shorter fiscal year. Sales to
new automotive customers totaled approximately $200,000 in fiscal 2001.
Gross profits decreased by approximately $876,000, due to the reduced
sales and to the shorter fiscal year.
Operating profits for the automotive segment decreased by approximately
$541,000. Although savings in expenses were realized due to reductions in
personnel, these were offset by a significant charge to bad debt expense
resulting from the Ames bankruptcy.
Pet supplies segment
Sales of pet supplies in the ten-month period of fiscal 2001 totaled
$2.9 million, an increase of approximately $344,000 compared with fiscal 2000,
which included twelve months. Most of the increase resulted from sales to new
customers, which included Ames after its bankruptcy filing. Sales to existing
customers decreased by approximately $300,000, due to the shorter fiscal period.
Gross profits increased by approximately $72,000, principally as a
result of the increased sales.
Operating profits for the pet segment increased by approximately
$114,000, due to the increase in gross profits and to lower expenses, including
personnel reductions in the current year.
13
Lawn and garden segment
SCPI established a lawn and garden division in fiscal 2000. For the ten
month period ended December 31, 2001, sales of lawn and garden products totaled
$836,000, compared with sales of $399,000 in fiscal 2000.
Gross profits increased by approximately $75,000 due to the higher
sales volume.
The segment reported an operating loss of approximately $55,000 in
fiscal 2001, compared with an operating profit of $44,000 in fiscal 2000. Fiscal
2000 included only four months of operations of the segment and two months of
rental expense on the Glassport lawn and garden warehouse.
Interest expense decreased by approximately $158,000 in fiscal 2001
compared with fiscal 2000 due to the shorter reporting period, to significantly
lower borrowing levels in the current year and to lower interest rates.
Results for the ten months ended December 31, 2001 (unaudited) compared with the
ten months ended December 31, 2000 (unaudited)
As Fiscal 2001 includes ten months compared with twelve months in Fiscal
2000, a separate discussion below compares results of Fiscal 2001 with the
comparable ten month period (unaudited) in Fiscal 2000.
Automotive Pet Lawn & Garden
---------- --- -------------
(in thousands) December 31, December 31, December 31, December 31, December 31, December 31,
2001 2000 2001 2000 2001 2000
Sales $ 13,645 $ 15,070 $ 2,986 $ 2,163 $ 836 $ 22
Gross profit $ 2,425 $ 2,890 $ 891 $ 657 $ 23 $ 3
Operating profit $ (21) $ 651 $ 471 $ 257 $ (55) $ 3
Automotive segment
Comparing results for the ten months ended December 31, 2001 with the
ten months ended December 31, 2000, sales of automotive products decreased by
$1.4 million, due primarily to the bankruptcy filing of Ames in August 2001.
Gross profits decreased by approximately $465,000, due to the sales decrease and
to pressure placed on the Company to reduce margins to larger customers.
Although savings were realized in operating and selling expenses due to a
reduction in personnel, these were offset by an increase of approximately
$469,000 in bad debt expense due to the bankruptcy filing of Ames.
Pet supplies segment
Sales for the ten months ended December 31, 2001 increased by
approximately $822,000 or 38% compared with the ten-month period ended December
31, 2000, due to sales to new customers, which included Ames after its
bankruptcy filing. Gross profit as a percentage of sales remained equal to the
comparable ten-month period in the prior year. Operating profits increased by
$214,000 due to the higher sales and to personnel reductions in the current
year.
Lawn and garden
Sales in this segment began in November 2000.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
SCPI is exposed to certain market risks from transactions that are
entered into during the normal course of business. The Company's policies do not
permit active trading of or speculation in, derivative financial instruments.
The Company's primary market risk exposure relates to interest rate risk. SCPI
manages its interest rate risk by attempting to balance its exposure between
fixed and variable rates while attempting to minimize its interest costs. An
increase of 1% in the market rate of interest would have increased the Company's
interest expense in fiscal 2002 by approximately $24,000.
Because the Company derives no revenues from foreign countries or
otherwise has no obligations in foreign currency, the Company experiences no
foreign currency exchange rate risk.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Reports...................................................... 26
Consolidated Balance Sheets: December 31, 2002 and December 31, 2001............... 27
Consolidated Statements of Operations for the fiscal periods ended
December 31, 2002, December 31, 2001 and February 28, 2001....................... 28
Consolidated Statements of Stockholders' Deficiency for the fiscal periods ended
December 31, 2002, December 31, 2001 and February 28, 2001 ...................... 29
Consolidated Statements of Cash Flows for the fiscal periods ended
December 31, 2002, December 31, 2001 and February 28, 2001 ..................... 30
Notes to Consolidated Financial Statements......................................... 31
Schedule II - Valuation and Qualifying Accounts................................ 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The by-laws of the Company currently provide for such number of
directors (but no less than five) as is determined from time to time by the
Board of Directors. In July 2001, upon the resignation of certain directors who
also resigned as directors of Sterling, the Board voted to decrease the number
of directors from seven to six. The following table lists the names and ages (at
February 1, 2003) of the directors, and the year in which each was elected a
director of the Company or its predecessor.
Name Age Director Since
---- --- --------------
John D. Abernathy 65 1996
Terrance W. Allan 49 1993
Robert M. Davies 52 1996
Bernard H. Frank 82 1993
Joseph P. Harper, Sr. 56 2001
Maarten D. Hemsley 53 1998
BUSINESS HISTORY OF DIRECTORS
Mr. Abernathy. Mr. Abernathy has been Chief Operating Officer of Patton
Boggs, LLP, a Washington DC law firm, since January 1995. From March 1991 to
February 1994 he was the Managing Director of Summit, Solomon & Feldesman, a New
York City law firm and from July 1983 until June 1990, Mr. Abernathy was
Chairman and Chief Executive Partner of BDO Seidman, a public accounting firm.
He is a director of Pharmaceutical Resources, Inc., a generic drug manufacturer
and also serves as a director of Sterling. Mr. Abernathy is a certified public
accountant.
Mr. Allan. Mr. Allan has been employed by the Company since 1983 and was
appointed President in June 2000. In May 2002, Mr. Allan was also appointed
Chief Executive Officer.
Mr. Davies. Mr. Davies was Chairman and Chief Executive Officer of
Sterling from May 1997 to July 2001 and was its President from May 1997 to
January 1999. He has served as a director of Sterling since May 1997 and
previously served as a director of SCPI and Sterling from 1991 through 1994. Mr.
Davies was a Vice President of Wexford Capital Corporation, which acts as the
investment manager to several private investment funds, from 1994 to March 1997.
From November 1995 to March 1997 Mr. Davies also served as Executive Vice
President of Wexford Management LLC, a private investment management company.
Mr. Davies is a managing director of Greenwich Power, which provides financial
and investment consultancy services to corporations with interests primarily in
energy-related fields. He is also a director of Industrial Acoustics Company,
Inc.
Mr. Frank. Mr. Frank was a founder of the Steel City Products business
more than 55 years ago. He has served as Chairman for more than the last five
years and was Chief Executive Officer until May 2002.
Mr. Harper. Mr. Harper is Chief Financial Officer, Treasurer and
Secretary of Sterling Houston Holdings, a subsidiary of Sterling, and has been
employed by that company since 1972. He has performed both estimating and
project management functions as well as his primary role as Chief Financial
Officer. Prior to joining the business, Mr. Harper worked for Price Waterhouse
and received his CPA license in 1970. Mr. Harper was elected a director and the
President of Sterling and a director of the Company in July 2001 in connection
with the closing of the transaction in which Sterling's ownership of SHH
increased to 80.1%.
16
Mr. Hemsley. Mr. Hemsley was re-elected to the Board of Directors of the
Company and of Sterling in December 1998. He had been an employee and director
of SCPI or Sterling for many years prior to 1995. In December 1995, he resigned
his positions with SCPI and Sterling and served as a consultant to SCPI and
Sterling through his wholly owned financial consultancy company, Bryanston
Management, Ltd. of which he has been President since 1993. Mr. Hemsley
currently serves as Chief Financial Officer of Sterling and of SCPI. He also
serves as a director of Industrial Acoustics Company, Inc.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities ("Insiders") to file reports
of ownership and certain changes in ownership with the Securities and Exchange
Commission and to furnish the Company with copies of those reports.
Based solely on a review of those reports and amendments thereto
furnished to the Company during its most recent fiscal year or written
representations by Insiders that no Forms 5 were required to be filed, the
Company believes that during the fiscal year ended December 31, 2002 all Section
16(a) filing requirements applicable to the Company's Insiders were satisfied.
REPORT OF THE AUDIT COMMITTEE FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002.
The Audit Committee of Sterling reviews the Company's financial
reporting process on behalf of the Board of Directors. The Committee operates
under a written Charter adopted by the Board in June 2000. Management has the
primary responsibility for the financial statements and the reporting process.
The Company's independent auditors are responsible for expressing an opinion on
the conformity of the Company's financial statements with generally accepted
accounting principles and whether the Company's financial statements present
fairly, in all material respects, the financial position and results of
operations of the Company.
In this context, the Audit Committee has reviewed and discussed with
management and the independent auditors the audited financial statements. The
Audit Committee has discussed with the independent auditors the matters required
to be discussed by Statement on Accounting Standards No. 61 ("Communication with
Audit Committees"). In addition, the Audit Committee has received from the
independent auditors the written disclosures required by Independence Standards
Board No. 1 ("Independence Discussions with Audit Committees") and discussed
with them their independence from the Company and its management.
In September 2001, the Company elected to change its independent
auditors to Grant Thornton LLP.
The following table sets forth the aggregate fees, both billed and
unbilled to the Company for the year ended December 31, 2002 by its current
independent auditors, Grant Thornton LLP:
Grant Thornton LLP
Audit fees $66,000
Financial information system design and implementation --
All other fees --
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the Board of Directors, and the Board has approved that
the audited financial statements be included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002 for filing with the Securities
and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION.
This item contains information about compensation, stock options grants
and employment arrangements and other information concerning certain of the
executive officers and the directors of the Company.
17
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation the Company paid or
accrued for services rendered in the Company's 2002, 2001 and 2000 fiscal years
by the Chief Executive Officer and the other executive officers of the Company
whose compensation exceeded $100,000 in fiscal 2002 and who were serving at the
end of the 2002 fiscal year. Fiscal 2001 included only ten months.
Annual Compensation Long-term Compensation Awards
------------------- -----------------------------
Name and Principal Year Salary Bonus Other Annual Securities Underlying All other
Position Compensation* Options** Compensation
Bernard H. Frank(1) 2002 $ 53,462 -- -- 2,500 $15,067(2)
Chairman 2001 $ 49,075 $20,833 -- -- $11,590
2000 $ 50,242 $25,000 -- -- $13,908
Terrance W. Allan 2002 $177,424 $25,118 -- 5,000 --
Chief Executive Officer 2001 $124,385 $40,771 -- -- --
and President 2000 $132,072 $60,515 -- -- --
- -----------------
* Excludes perquisites and other personal benefits if the aggregate
amount of such items of compensation was less than the lesser of either
$50,000 or 10% of the total annual salary and bonus of the named
executive officer.
** These options relate to shares of Sterling Construction Company, Inc.
("Sterling"), not the Company.
(1) All the above officers are compensated only by the Company except with
respect to stock options.
(2) This amount consists of $6,504, $5,508 and $1,896 that Mr. Frank
receives annually under three substantially identical agreements
amended in 1987 in consideration of the waiver by Mr. Frank of his
bankruptcy claims for annuity rights in the Company's predecessor's
bankruptcy. For the ten months ended December 31, 2001, Mr. Frank was
paid $11,590. In fiscal 2002, Mr. Frank received 13 payments.
COMPENSATION AGREEMENTS
Mr. Frank. In fiscal 1997, in light of the Company's financial
performance, Mr. Frank voluntarily reduced his annual salary by 50%. In February
1998, Mr. Frank's annual base salary was set by agreement at $50,000; he was
granted participation in a deferred compensation program commencing March 1,
1998 providing for the payment to him of $5,000 per month for twenty-four months
to compensate him for the portion of his salary previously foregone by him; and
commencing March 1, 1998, Mr. Frank was made eligible to participate in a bonus
program pursuant to which the Compensation Committee of the Board of Directors
in its discretion and after reviewing the Company's performance and cash
position may grant to him on a quarterly basis a bonus not to exceed $25,000 in
the aggregate in any one fiscal year. In fiscal 2001, Mr. Frank was paid $6,250
in respect of this bonus plan. After a significant customer filed for bankruptcy
in August 2001, Mr. Frank voluntarily deferred payment of all of his annual base
salary. Such deferral was reflected as an accrued liability of the Company, and
Mr. Frank began receiving his regular salary in January 2002. In April 2002, Mr.
Frank's employment agreement and all accrued but unpaid amounts were
restructured to provide for an annual salary beginning in 2003 of $30,000 and an
annual salary of $15,000 in 2004. His accrued but unpaid bonus aggregating
approximately $33,000 is being repaid in monthly installments of approximately
$900 through January 2005. Mr. Frank's deferred compensation (aggregating
approximately $13,500) is to be repaid through a $10,000 payment in 2003 and the
balance in 2004.
Mr. Frank also receives compensation of $13,908 per year, in the
aggregate, under three substantially identical agreements amended in 1987 in
consideration of the waiver by Mr. Frank of his bankruptcy claims for annuity
rights in the Company's predecessor's bankruptcy. The amended agreements provide
for payments to be made for a period of fifteen years subsequent to January 1988
of $6,504, $5,508 and $1,896 per year for the three agreements, respectively.
18
Mr. Allan. The Company has an employment agreement with Mr. Allan
(sometimes hereinafter referred to as the "executive") which commenced May 1,
2000 that provides for a base salary of $133,000 with annual salary increases.
Payment of the increase due in September 2001 and part of his regular salary was
voluntarily deferred by Mr. Allan in light of the Chapter 11 filing of Ames, one
of the Company's largest customers. The deferral was reflected as an accrued
liability of the Company. In January 2002, Mr. Allan began receiving his entire
regular salary. The agreement provided for the payment of an annual management
bonus based upon the defined profits of the Company's operating division and an
executive bonus calculated as a percentage of defined annual profits of the
Company that exceeded $2,000,000; these bonus provisions were superseded in 2002
by Mr. Allan's participation in a new bonus plan for all members of SCPI's
management. Pursuant to the bonus program, Mr. Allan is entitled to a
profit-based bonus based on achievement of budgeted EBITDA, ranging from 8% of
his base salary if 75% of the budgeted level is achieved, to 51% of base salary
if EBITDA equals twice the budgeted level. In addition, Mr. Allan is entitled to
a discretionary bonus of up to one-third of the profit-based bonus paid. The
initial term of the agreement, as extended, expires on September 30, 2003, and
may be extended thereafter on a year-to-year basis.
The agreement also provides that if the executive's employment
terminates by reason of his death or disability, he is entitled to the greater
of one year's salary or the salary for the balance of the term of the agreement
and the bonus that would otherwise have been paid to him. If the executive's
employment is otherwise terminated without cause, he is entitled to his salary
and bonuses for the greater of one year or the balance of the term of the
agreement.
The agreement also provides for certain termination rights in the event
of a change in control of the Company. Change in control is defined to include
certain changes in the make-up of the Company's board of directors or a sale of
the Company's assets or business. The executive has the right to terminate his
employment within six months following a change in control and be paid his base
salary for a period of up to 24 months following such termination. In the event
of any termination other than for cause, or voluntary resignation in the absence
of a change in control, the executive's options become fully exercisable for a
period of one-year following termination. If a change in control had occurred on
December 31, 2002, and if Mr. Allan had exercised his rights of termination,
payments by the Company would have been approximately $290,000 in the aggregate.
STOCK OPTION GRANTS.
In fiscal 2002, 5,000 and 2,500 options for shares of Sterling stock
were granted to Messrs. Allan and Frank, respectively. These options vest over a
four-year period, with one-quarter of the total immediately exercisable. During
fiscal 2001 no option grants relating to the Company's shares were made to any
of the named executive officers.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
During fiscal 2001, no options were exercised by any of the named
executive officers.
The following table sets forth certain information at December 31,
2002, the Company's fiscal year end, based upon the closing price per share of
Sterling's common stock, ($1.75) on that date, as they relate to stock options
held at that date by each of the individuals named in the Summary Compensation
Table. The "value" of unexercised in-the-money options is the difference between
the market value of the common stock subject to the options at December 31, 2002
and the exercise (purchase) price of the option shares.
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money Options
Options at Fiscal Year End at Fiscal Year End
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
STERLING COMMON STOCK
Bernard H. Frank 76,702 1,875 $15,969 $469
Terrance W. Allan 40,331 3,750 $15,125 $938
19
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION FOR THE FISCAL
YEAR ENDED DECEMBER 31, 2002.
This report has been prepared by the Compensation Committee of the
Board of Directors of the Company and addresses the Company's compensation
policies with respect to the Chief Executive Officer and executive officers of
the Company in general for the 2002 fiscal year. Except for Mr. Frank, each
member of the Committee is a non-employee director.
COMPENSATION POLICY
The overall intent of the Committee in respect of executive officers is
to establish levels of compensation that provide appropriate incentives in order
to command high levels of individual performance and thereby increase the value
of the Company to its stockholders, and that are sufficiently competitive to
retain and attract the skills required for the success and profitability of the
Company. The principal components of executive compensation are salary and
bonus.
CHIEF EXECUTIVE OFFICER'S COMPENSATION
Mr. Allan is compensated under a written employment agreement, which is
reviewed by Sterling's Compensation Committee and approved by the Company's
Compensation Committee.
MESSRS. FRANK AND ALLAN
Salary. Both executives are long-term employees of the Company and its
predecessor, and Mr. Frank is a founder of the original business. Accordingly,
the salary of each executive was based on the level of his prior salary and the
subjective judgement of the members of the Committee as to the value of the
executive's past contribution and potential future contribution to the
profitability of the business.
Bonuses. Bonus is paid pursuant to the terms of each executive
officer's employment agreement described above under the heading "Compensation
Agreements."
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of
the Internal Revenue Code (enacted in 1993) generally disallows a tax deduction
to public companies for compensation over $1 million paid to its chief executive
officer and its four other most highly compensated executives. The Company's
compensation payable to any one executive officer (including potential income
from outstanding stock options) is currently and for the foreseeable future
unlikely to reach that threshold. In addition, because of the significant net
operating loss carry-forwards of the Company, the tax deductibility of
compensation payments is not currently an issue. However, should circumstances
change, the Compensation Committee will study the matter and make
recommendations to the Board of Directors.
The Compensation Committee: Bernard H. Frank
Joseph P. Harper, Sr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Frank is a director, executive officer and employee of the Company.
Mr. Davies also serves as a director of Sterling.
20
DIRECTORS' COMPENSATION
No fees are paid to directors for attendance at board or committee
meetings. However, board members are entitled to reimbursement of out-of-pocket
expenses incurred in attending such meetings.
The Performance Graph and the Report of the Compensation Committee on Executive
Compensation in this Item 11 are not and shall not be deemed incorporated by
reference into any filings of the Company with the Securities and Exchange
Commission by implication or by any reference in any such filings to this Proxy
Statement.
PERFORMANCE GRAPH
The following graph assumes an investment of $100 on December 31, 1997
and compares annual changes thereafter in the market price of the Company's
Common Stock with (i) the Dow Jones Global US Market Index (a broad market
index), and (ii) the Dow Jones Retailers - Other Specialty Index, a group of
companies whose marketing strategy is focused on a limited product line, such as
automotive parts. Both indices are published in the Wall Street Journal.
Sterling owns 100% of the preferred stock of the Company and 10% of the
outstanding common stock, thus Sterling retains most of the value of SCPI.
STEEL CITY PRODUCTS, INC.
Dow Jones - Other Specialty Dow Jones - Total Return SCPI
1997 100 100 100
1998 120 125 50
1999 128 153 50
2000 150 139 100
2001 158 122 33
2002 132 95 17
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT.
The following tables set forth certain information regarding beneficial
ownership of the Common Stock at March 1, 2003. Except as otherwise indicated in
the footnotes, the Company believes that the beneficial owners of the Common
Stock listed in this Item 12, based on information furnished by such owners,
have sole investment and voting power with respect to the shares of Common Stock
shown as beneficially owned by them.
21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS
This table sets forth certain information regarding beneficial
ownership of the Common Stock by each person known by the Company to own
beneficially more than 5% of the outstanding Common Stock.
Name and Address Number of Shares of Percentage of
of Beneficial Owner Series A Preferred Stock Class
------------------- ------------------------ -------------
Sterling Construction Company, Inc. 1,938,526 100%
2751 Centerville Road, Suite 3131
Wilmington, Delaware 19808
Name and Address Number of Shares of Percentage of
of Beneficial Owner Common Stock Class
------------------- ------------------- -------------
Sterling Construction Company, Inc. 286,955 10.0%
2751 Centerville Road, Suite 3131
Wilmington, Delaware 19808
SECURITY OWNERSHIP OF MANAGEMENT
This table sets forth information regarding beneficial ownership of the
Company's Common Stock (including Common Stock issuable upon exercise of
outstanding options) by each director, each executive officer named in the
"Summary Compensation Table" in Item 11, above, and by all directors and
executive officers of the Company as a group. The directors and officers of the
Company have furnished the information themselves. No director or officer owns
any shares of Preferred Stock of the Company.
Number of Shares of Percentage of
Name Common Stock Class
----
Maarten D. Hemsley................... --(1) --
Bernard H. Frank....................... --(1) --
Terrance W. Allan..................... --(1) --
John D. Abernathy..................... -- --
All directors and executive officers
as a group, 5 persons.................. --(1) --
* Less than 1%
(1) Stock options for the Company's stock, issued in 1991 and exercisable at
$0.625 per share, expired January 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to "Compensation of Directors" and "Compensation
Committee Interlocks and Insider Participation" in Item 11, above.
22
PART IV
ITEM 14. CONTROLS AND PROCEDURES
The Company's management, including the Chief Executive Officer and
Chief Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures (as defined in Securities Exchange Act of
1934 Rules 13a-14 (c) and 15d-14 (c)) as of a date within 90 days before the
filing date of this Report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures are effective in ensuring that all material information required to
be filed in this Annual Report on Form 10-K has been made known to them in a
timely fashion. There have been no significant changes in internal controls
subsequent to the date the Chief Executive Officer and Chief Financial Officer
completed their evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report.
1. Financial Statements:
Independent Auditors' Reports
Consolidated Balance Sheets: December 31, 2002 and December 31, 2001
Consolidated Statements of Operations for the fiscal periods ended
December 31, 2002, December 31, 2001 and February 28, 2001
Consolidated Statements of Stockholders' Deficiency for the fiscal
periods ended December 31, 2002, December 31, 2001 and February
28, 2001
Consolidated Statements of Cash Flows for the fiscal periods ended
December 31, 2002, December 31, 2001 and February 28, 2001
Notes to Consolidated Financial Statements
2. Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes
thereto.
3. Certifications
4. Exhibits
Exhibit No. Description
3.1 Restated Certificate of Incorporation (filed as Exhibit 3(a)
to the Company's Annual Report on Form 10-K for the fiscal
year ended February 27, 1993).
3.2 By-laws of the Company as amended through May 17, 1993 (filed
as Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended February 26, 1994).
#10.1 Employment Agreement with Bernard H. Frank dated as of April 1,
1998 (filed as Exhibit 10.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended February 28, 1999).
#10.2 Employment Agreement with Terrance W. Allan dated as of
September 1, 1993 (filed as Exhibit 10.3 to the Company's
Annual Report of Form 10-K for the fiscal year ended February
26, 1994).
23
#10.4 Form of Option Agreement dated August 29, 1991 with directors
and executive officers (filed as Exhibit 10(t) to the Company's
Annual report on Form 10-K for the fiscal year ended February
29, 1992).
10.5 Note Agreements with William T. Apgar, Liquidating Trustee for
the Retail Acquisition Corp. Amended Plan of Reorganization,
(filed as Exhibit 10(w) the Company's Annual Report on Form
10-K for the fiscal year ended February 27, 1993).
10.6 Trademark & Trade Name License Agreement between Oakhurst
Holdings, Inc. and Steel City Products, Inc., dated August 16,
1995, (filed as exhibit #10.12 to the Company's Annual Report
on Form 10-K for the fiscal year ended February 29, 1996).
10.7 Corporate Services Agreement between Steel City Products, Inc.
and Oakhurst Management Corporation dated June 1, 1995, (filed
as exhibit #10.13 to the Company's Annual Report on Form 10-K
for the fiscal year ended February 29, 1996).
10.8 Lease agreement by and between Regional Industrial Development
Corporation of Southwestern Pennsylvania and Steel City
Products, Inc., dated November 11, 1997- (filed as exhibit #10
to the Company's Form 10-K for the year ended February 28,
1998)
10.9 Lease agreement by and between SPEDD, Inc. and Steel City
Products, Inc. dated November 21. 2000. (filed as exhibit 10.9
to the Company's Form 10-K for the year ended February 28,
2001)
10.10 Employment Agreement with Terrance W. Allan dated as of May 1,
2000. (filed as exhibit 10.10 to the Company's Form 10-K for
the year ended February 28, 2001)
10.11 Revolving Credit Agreement dated July 13, 2001 between National
City Bank of Pennsylvania and Steel City Products, Inc. (filed
as exhibit 10.1 to the Company's Form 10-Q for the quarter
ended May 31, 2001)
10.12 Amendment to the Revolving Credit Agreement dated September 12,
2001 between National City Bank of Pennsylvania and Steel City
Products, Inc. (filed as exhibit 10.1 to the Company's Form
10-Q for the quarter ended August 31, 2001)
10.13 Second Amendment to the Revolving Credit Agreement between
National City Bank of Pennsylvania and Steel City Products,
Inc. dated December 12, 2001. (filed as exhibit 10.13 to the
Company's Form 10-K for the Transition Period ended December
31, 2001)
10.14 Third Amendment to the Revolving Credit Agreement between
National City Bank of Pennsylvania and Steel City Products,
Inc. dated June 27, 2002 (filed as Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended June 30, 2002).
10.15 Fourth Amendment to the Revolving Credit Agreement between
National City Bank of Pennsylvania and Steel City Products,
Inc. dated September 25, 2002 (filed as Exhibit 10.3 to the
Company's Form 10-Q for the quarter ended September 30, 2002).
*10.16 Fifth Amendment to the Revolving Credit Agreement between
National City Bank of Pennsylvania and Steel City Products,
Inc. dated November 30, 2002.
21 Subsidiaries at December 31, 2002:
Oakhurst Holdings, Incorporated - Delaware
- -----------------
#Management contract or compensatory plan or arrangement.
*Filed herewith
(b) Reports on Form 8-K:
None
24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Steel City Products, Inc.:
We have audited the accompanying consolidated balance sheets of Steel City
Products, Inc. and subsidiary as of December 31, 2002 and December 31, 2001 and
the related consolidated statements of operations, stockholders' deficiency, and
cash flows for the year ended December 31, 2002 and the ten months ended
December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Steel City Products,
Inc. and subsidiary as of December 31, 2002 and December 31, 2001 and the
results of their operations and their cash flows for the year ended December 31,
2002 and the ten months ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America.
We also audited Schedule II for the year ended December 31, 2002 and for the ten
months ended December 31, 2001. In our opinion, this schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information therein.
/s/ Grant Thornton LLP
Southfield, Michigan
February 3, 2003
25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Steel City Products, Inc.:
We have audited the accompanying consolidated statements of operations,
stockholders' deficiency, and cash flows of Steel City Products, Inc. and
subsidiary for the year ended February 28, 2001. Our audit also included the
consolidated financial statement schedule listed at Item 15(a)(2) for the year
ended February 28, 2001. These consolidated financial statements and
consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
consolidated financial statements and consolidated financial statement schedule
based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Steel City
Products, Inc. and subsidiary for the year ended February 28, 2001 in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, the consolidated financial statement schedule for the year
ended February 28, 2001, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth herein.
/s/ Deloitte and Touche LLP
Pittsburgh, Pennsylvania
July 6, 2001
26
STEEL CITY PRODUCTS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31, December 31,
2002 2001
---- ----
ASSETS
Current assets:
Cash....................................................................... $ 296 $ 263
Trade accounts receivable, less allowance of $841 and $588, respectively... 2,156 1,963
Inventories................................................................ 3,141 3,533
Deferred tax asset......................................................... 170 170
Other...................................................................... 102 91
------------ ----------
Total current assets............................................. 5,865 6,020
Property and equipment, at cost................................................. 1,416 1,315
Less accumulated depreciation.............................................. (1,088) (988)
------------ ----------
328 327
Deferred tax asset, long term................................................... 557 630
Other assets.................................................................... 156 157
------------ ----------
$ 6,906 $ 7,134
============ ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable........................................................... $ 4,120 $ 4,323
Accrued compensation....................................................... 383 324
Current maturities of long-term obligations................................ 77 83
Other...................................................................... 159 130
------------ ----------
Total current liabilities........................................ 4,739 4,860
Long-term obligations:
Long-term debt............................................................. 2,617 2,535
Long-term debt, due to parent.............................................. 500 500
Other long-term obligations................................................ 57 100
------------ ----------
3,174 3,135
Commitments and contingencies................................................... -- --
Stockholders' deficiency:
Preferred stock, par value $0.01 per share; authorized 5,000,000 shares,
issued 1,938,526 shares; liquidation preference $10,135.............. 19 19
Common stock, par value $0.01 per share; authorized 5,000,000 shares,
issued 3,238,061 shares.............................................. 32 32
Additional paid-in capital................................................. 43,824 43,824
Deficit.................................................................... (35,004) (35,422)
Advances to Sterling Construction Company, Inc. (See Note 3)............... (9,877) (9,313)
Treasury stock, at cost, 207 common shares................................. (1) (1)
------------ ----------
Total stockholders' deficiency................................... (1,007) (861)
------------ ----------
$ 6,906 $ 7,134
============ ==========
The accompanying notes are an integral part of these financial statements
STEEL CITY PRODUCTS, INC.
27
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
December 31, December 31, February 28,
2002 2001 2001
---- ---- ----
(ten months)
------------
Sales.......................................................... $ 22,570 $ 17,467 $ 20,694
Interest income................................................ 199 255 416
Other income................................................... 272 124 448
------------ ------------ ------------
23,041 17,846 21,558
------------ ------------ ------------
Cost of goods sold, including buying, occupancy and
warehouse expenses............................................. 18,917 14,865 17,436
Selling and administrative expenses............................ 3,084 2,415 3,078
Provision for doubtful accounts................................ 259 483 30
Interest expense............................................... 276 275 433
------------ ------------ ------------
22,536 18,038 20,977
------------ ------------ ------------
Income (loss) before and income taxes.......................... 505 (192) 581
Current income tax (expense)................................... (14) (14) (27)
Deferred income tax (expense) benefit.......................... (73) 800 -
------------ ------------- ------------
Total tax (expense) benefit............................... (87) 786 (27)
------------ ------------ ------------
Net income..................................................... 418 594 554
Effect of Series A Preferred Stock dividends................... (1,014) (850) (1,014)
------------ ------------ ------------
Net loss attributable to common stockholders................... $ (596) $ (256) $ (460)
============ ============ ============
Basic and diluted net loss per share:
Net loss attributable to common stockholders after
preferred stock dividends............................ $ (0.18) $ (0.08) $ (0.14)
============ ============ ============
Weighted average number of shares outstanding used in
computing per share amounts............................... 3,238,061 3,238,061 3,238,061
============ ============ ============
The accompanying notes are an integral part of these financial statements
28
STEEL CITY PRODUCTS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(DOLLARS IN THOUSANDS)
Advances
to
Sterling
Additional Construction
Preferred Common Paid-In Retained Company, Treasury
stock stock Capital Deficit Inc. stock Totals
----- ----- ------- ------- ---- ----- ------
BALANCE AT FEBRUARY 29, 2000 $ 19 $ 32 $ 43,824 $(36,570) $ (8,330) $ (1) $ (1,026)
Change in advances to Sterling
Construction Company, Inc. (653) (653)
Net income - - - 554 - - 554
------ ----- ---------- -------- ------------ -------- --------
BALANCE AT FEBRUARY 29, 2001 19 32 43,824 (36,016) (8,983) (1) (1,125)
Change in advances to Sterling
Construction Company, Inc. (330) (330)
Net income - - - 594 - - 594
------ ----- ---------- -------- ------------ -------- --------
BALANCE AT DECEMBER 31, 2001 19 32 43,824 (35,422) (9,313) (1) (861)
Change in advances to Sterling
Construction Company, Inc. (564) (564)
Net income - - - 418 - - 418
------ ----- ---------- -------- ------------ -------- --------
BALANCE AT DECEMBER 31, 2002 $ 19 $ 32 $ 43,824 $(35,004) $ (9,877) $ (1) (1,007)
====== ===== ========== ======== ============ ======== ========
The accompanying notes are an integral part of these financial statements
29
STEEL CITY PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
December 31, December 31, February 28, 2001
------------ ------------ -----------------
2002 2001
---- ----
(ten months)
------------
Cash flows from operating activities:
Net income ........................................................... $ 418 $ 594 $ 554
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ..................................... 149 120 144
Bad debt expense .................................................. 259 483 30
Deferred tax expense (benefit) .................................... 73 (800) -
Other ............................................................. - - (164)
Other changes in operating assets and liabilities:
Accounts receivable ............................................... (452) 145 (143)
Inventories ....................................................... 392 618 644
Accounts payable .................................................. (203) (66) (480)
Other ............................................................. 39 24 (5)
------------ ------------ -----------------
Net cash provided by operating activities .................................. 675 1,118 580
------------ ------------ -----------------
Cash flows from investing activities:
Additions to property and equipment .................................. (69) (29) (55)
------------ ------------ -----------------
Cash flows from financing activities:
Net borrowings/(repayments) under revolving
credit agreement ..................................................... 82 (929) 292
Net increase in advances to Sterling Construction
Company, Inc. ........................................................ (564) (330) (653)
Proceeds from related-party long-term borrowings...................... - 500 -
Principal payments on long-term obligations .......................... (81) (63) (68)
Deferred loan costs .................................................. (10) (87) (20)
------------ ------------ -----------------
Net cash used in financing activities ...................................... (573) (909) (449)
------------ ------------ -----------------
Net increase in cash ....................................................... 33 180 76
Cash at beginning of year .................................................. 263 83 7
------------ ------------ -----------------
Cash at end of year ........................................................ $ 296 $ 263 $ 83
============ ============ =================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ............................................................. $ 278 $ 284 $ 452
============ ============ =================
Income taxes, net of refunds received ................................ $ 14 $ 13 $ 1
============ ============ =================
Supplemental disclosure of non-cash financing activities:
Capital lease obligations for new equipment .......................... $ 32 $ - $ 71
============ ============ =================
The accompanying notes are an integral part of these financial statements
30
STEEL CITY PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The accompanying consolidated financial statements include the accounts
of subsidiaries for which the Company has a greater than 50% ownership interest
and all significant intercompany accounts and transactions have been eliminated
in consolidation.
Business Activities:
Steel City Products, Inc. ("SCPI" or "the Company") is a wholesale
distributor of automotive accessories, non-food pet supplies and lawn and garden
products, operating under the trade name Steel City Products, selling mainly to
supermarket retailers, drug stores, discount retail chains, hardware and
automotive specialty stores, based principally in the Northeastern United
States. SCPI is a majority-owned subsidiary of Sterling Construction Company,
Inc., ("Sterling") (see Note 2).
Use of Estimates:
The financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Significant estimates
included in the Company's financial statements include the allowance for
doubtful accounts and estimates for the use of the Company's net operating loss
carryforwards. Actual results could differ from those estimates.
Fiscal Year:
Prior to November 2001, the Company's fiscal year ended on the last day
of February. In November 2001, the Company's directors approved a change in its
fiscal year end to December 31. Fiscal 2002 relates to the 12 months from
January 1, 2002 through December 31, 2002. The ten-month transition period ended
December 31, 2001 is referred to herein as fiscal 2001, the twelve months ended
February 28, 2001 is referred to as fiscal 2000 and the twelve months ended
February 29, 2000 is referred to as fiscal 1999.
Concentration of Credit Risk:
Financial instruments, such as accounts receivable, potentially subject
the Company to credit risk. The Company performs ongoing credit evaluations of
its customers' financial condition, and maintains a provision for potential
credit losses based upon expected collectibility of all accounts receivable. At
December 31, 2002 five customers carried accounts receivable balances in excess
of 10% of total accounts receivable, aggregating 62% of total accounts
receivable. At December 31, 2001, four customers carried accounts receivable
balances in excess of 10% of total accounts receivable, which aggregated 75% of
total accounts receivable.
Accounts Receivable Allowance:
The Company extends credit to its customers based on an evaluation of
the customer's financial condition. The Company maintains an allowance for
doubtful accounts, which is reviewed periodically based on customer credit
history reports. The Company believes it conservatively estimates its doubtful
account analysis. In July 2001, a significant customer, Ames Department Stores,
filed for bankruptcy and the allowance for doubtful accounts was increased by
approximately $400,000. In July 2002, Ames liquidated its business, resulting in
an additional increase to doubtful accounts of approximately $250,000.
31
Customer Incentives:
Incentives received from vendors of the Company are passed on to the
Company's customers upon completion of promotional events, or maintenance of
sales thresholds in the form of discounts or rebates. The Company records these
incentives, when received, as a liability in a pooled account and relieves the
account as claims are paid. If certain documentation is not provided, or if
sales thresholds are not met, the Company records the excess funds as income not
less than 90 days nor more than nine months from the expiration of the
promotion. During fiscal 2002, the Company received vendor incentives of
approximately $400,000, of which approximately $200,000 had been paid to
claimants. At December 31, 2002, approximately $100,000 remained as a reserve
against future claims.
Inventories:
Inventories are valued at the lower of cost, as determined by the
first-in first-out (FIFO) method, or market.
Property and Equipment:
Depreciation and amortization are computed using the straight-line
method. Estimated useful lives used for computing depreciation and amortization
are: leasehold improvements, 10 years, and office furniture, warehouse equipment
and vehicles, 3-10 years. Depreciation expense was approximately $100,000 for
the fiscal year ended December 31, 2002 and $88,000 and $118,000 in fiscal 2001
and 2000, respectively.
Other Assets:
Other assets include goodwill associated with the acquisition of Steel
City Products in 1982, which was amortized over 40 years until the complete
adoption of SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and
other Intangibles". The unamortized carrying value at December 31, 2002 and
December 31, 2001 is approximately $127,000 and $129,000, respectively.
Accumulated amortization at December 31, 2002 and December 31, 2001 is
approximately $126,000 and $127,000, respectively. In accordance with the
provisions of SFAS No. 142, goodwill is no longer being amortized. In accordance
with SFAS No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets",
the Company performed impairment testing in the second and fourth quarter of
fiscal 2002. The analysis did not indicate impairment of the Company's recorded
goodwill.
The following table adjusts net loss for the add back of goodwill
amortization as of the year ended December 31, 2002, the ten months ended
December 31, 2001 and the year ended February 28, 2001 (dollar amounts in
thousands, except per share amounts):
Fiscal year ended Ten months ended Fiscal year ended
December 31, 2002 December 31, 2001 February 28, 2001
----------------- ----------------- -----------------
Reported net loss: $ (596) $ (256) $ (460)
Add back goodwill amortization: 1 5 6
------ ------ ------
Adjusted net loss: $ (595) $ (251) $ (454)
====== ====== ======
Basic and diluted loss per share:
Reported net loss per share: $(0.18) $(0.08) $(0.14)
Goodwill amortization 0.00 0.00 0.00
------ ------ ------
Adjusted net loss per share: $(0.18) $(0.08) $(0.14)
====== ====== ======
32
Equipment Under Capital Leases:
The Company accounts for capital leases, which transfer substantially
all the benefits and risks incident to the ownership of the property to the
Company, as the acquisition of an asset and the incurrence of an obligation.
Under this method of accounting, the cost of the leased asset is amortized
principally using the straight-line method over its estimated useful life and
the obligation, including interest thereon, is liquidated over the life of the
lease. Depreciation expense on leased equipment and the related accumulated
depreciation is included with that of owned equipment.
Revenue Recognition:
Revenues are recognized when all of the following criteria are met:
- There is persuasive evidence that an arrangement
exists
- Shipment has occurred
- The sales price to the buyer is fixed and
determinable, and
- Collectibility is reasonably assured.
The Company provides appropriate provisions for uncollectible accounts
and credit for returns.
Shipping and Handling:
Shipping costs are included as cost of goods sold.
Expenses incurred for handling goods in preparation for shipment to
customers totaled $875,000, $736,000 and $898,000 during fiscal 2002, 2001 and
2000, respectively. These expenses are primarily related to warehouse personnel
and related expenses and are presented in the financial statements as part of
cost of goods sold. Prior to fiscal 2002, handling expenses were reported as
part of operating, selling and administrative expenses. In fiscal 2002, these
expenses are included as a component of cost of goods sold. Years prior to
fiscal 2002 have been reclassified to reflect this treatment.
Federal Income Taxes:
SCPI utilizes an asset and liability approach to accounting for income
taxes. Deferred tax liabilities and assets are recognized for the future tax
consequences of events that have already been recognized in the financial
statements or tax returns. Net deferred tax assets are recognized to the extent
that management believes that realization of such benefits is more likely than
not. Changes in enacted tax rates or laws may result in adjustments to the
recorded deferred tax assets or liabilities in the period that the tax law is
enacted (see Note 7).
SCPI is included in the consolidated federal income tax return of
Sterling. For financial reporting purposes, income taxes are calculated on a
stand-alone basis.
Earnings Per Share:
Basic earnings or loss per share is computed by dividing the net
earnings or net loss attributable to common stockholders by the weighted average
number of common shares outstanding during the year. Loss per share amounts do
not include shares of common stock issuable upon the exercise of stock options
since that would have an antidilutive effect and reduce net loss per share. In
January 2002, all outstanding options, covering the purchase of 126,198 shares
of common stock, expired. At December 31, 2001 and February 28, 2001, there were
options to purchase 126,198 shares of common stock outstanding.
33
Stock Based Compensation:
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations.
In recent years, stock-based compensation in the form of options
granted to employees of SCPI were options to purchase stock of SCPI's parent,
Sterling. No stock-based employee compensation cost is reflected in net income,
as all options granted under the Sterling stock option plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
FASB Statement No. 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation (dollars in thousands, except per share data).
Fiscal year ended Ten months ended Fiscal year ended
December 31, 2002 December 31, 2001 February 28, 2001
----------------- ----------------- -----------------
Net loss, as reported $ (596) $ (256) $ (460)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (16) (15) (8)
------- ------- -------
Proforma net loss $ (612) $ (271) $ (468)
Basic and diluted net loss per share:
As reported $ (0.18) $ (0.08) $ (0.14)
Proforma $ (0.18) $ (0.08) $ (0.14)
Change in Method of Accounting:
Effective March 1, 2001, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities".
These standards require the Company to recognize all derivatives as either
assets or liabilities at fair value in its balance sheet. The accounting for
changes in the fair value of a derivative depends on the use of the derivative.
There was no effect on the financial statements upon adoption of this
new standard on March 1, 2001.
New Accounting Pronouncements:
During June 2001, the Financial Accounting Standards Board issued two
new accounting standards, Statement of Financial Accounting Standards ("SFAS")
No. 141 "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangibles".
SFAS No. 141 eliminates the pooling of interests method of accounting
for business combinations initiated prior to July 2001. SFAS No. 142, which
became effective January 1, 2002, discontinued the requirement for amortization
of goodwill and indefinite-lived intangible assets, and instead requires an
annual review of the impairment of those assets. Impairment is to be examined
more frequently if certain indicators appear. Intangible assets with a
determinable life will continue to be amortized. The Company has determined that
the adoption of these statements did not have a material effect on its financial
statements.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143 "Accounting for Asset Retirement
Obligations", which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard is effective for fiscal years beginning
after June 15, 2002. The Company does not expect this pronouncement to have an
impact on its consolidated financial statements.
34
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses implementation
issues related to SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of". This standard is effective
for fiscal years beginning after December 31, 2001. The Company does not expect
this pronouncement to have an impact on its consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FAS Statement No. 13, and Technical
Corrections ("SFAS 145"). This statement rescinds the requirement in SFAS No. 4,
Reporting Gains and Losses from Extinguishment of Debt, that material gains and
losses on the extinguishment of debt be treated as extraordinary items. The
statement also amends SFAS No. 13, Accounting for Leases, to eliminate an
inconsistency between the accounting for sale-leaseback transactions and the
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. Finally the standard makes a number of
technical corrections to other standards. The provisions of the statement
relating to the rescission of SFAS 4 are effective for fiscal years beginning
after May 15, 2002. Provisions of the statement relating to the amendment of
SFAS 13 are effective for transactions occurring after May 15, 2002 and the
other provisions of the statement are effective for financial statements issued
on or after May 15, 2002. The Company has reviewed SFAS 145 and concluded that
its adoption will not have a material effect on its consolidated financial
statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Exit or
Disposal Activities ("SFAS 146"). SFAS 146 applies to costs associated with an
exit activity (including restructuring) or with a disposal of long-lived assets.
Those activities can include eliminating or reducing product lines, terminating
employees and contracts, and relocating plant facilities or personnel. SFAS 146
will require a Company to disclose information about its exit and disposal
activities, the related costs, and changes in those costs in the notes to the
interim and annual financial statements that include the period in which an exit
activity is initiated and in any subsequent period until the activity is
completed. SFAS 146 is effective prospectively for exit or disposal activities
initiated after December 31, 2002, with earlier adoption encouraged. SFAS 146
supersedes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring), and requires liabilities
associated with exit and disposal activities to be expensed as incurred and can
be measured at fair value. SFAS 146 is effective for exit or disposal activities
of the Company that are initiated after December 31, 2002. The adoption of SFAS
146 is not expected to have a material effect on the Company's consolidated
financial statements.
In December, 2002, the FASB issued FASB Statement No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure", which amends FASB
Statement No. 123 to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
transition guidance and annual disclosure provisions for SFAS No. 148 are
effective for fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reporting containing financial
statements for interim periods beginning after December 15, 2002. The Company
adopted Statement No. 148 in January 2003, and will transition utilizing the
prospective method for options granted after January 1, 2003. The Company does
not believe the effect of adoption SFAS No. 148 will have a material effect on
its financial position or results of operations.
35
2. CORPORATE REORGANIZATION
In accordance with a merger transaction in 1991, SCPI issued to
Sterling shares of its common stock and Series A Preferred Stock so that the
aggregate fair market value of such stock owned by Sterling totaled
approximately 90% of the aggregate fair market value of SCPI. Sterling controls
approximately 90% of the outstanding voting power of SCPI and receives
substantially all of the benefit of operations through dividends on the
preferred stock.
The Series A Preferred Stock carries a dividend rate of $0.5228 per
share and has a redemption price and liquidation preference of $5.2282 per share
plus any accumulated dividends in arrears. Through December 31, 2002, dividends
of approximately $11.5 million have accumulated since the effective date of the
merger; of this amount, approximately $3.6 million has been declared by SCPI's
Board of Directors and paid. Approximately $7.9 million of undeclared dividends
in arrears were outstanding at December 31, 2002. The Series A Preferred Stock
has voting rights that are ten times greater than the common stock voting
rights.
3. ADVANCES TO STERLING CONSTRUCTION COMPANY, INC.
Until March 2002, SCPI participated in a cash concentration system with
Sterling, whereby available cash at SCPI was transferred to Sterling. Since
March 2002, SCPI has upstreamed to Sterling only the cash needed to cover
Sterling's operating expenses. Any available cash that has been transferred to
Sterling has been reflected as an addition to the advances to Sterling. Such
advances bear interest at a rate sufficient to reimburse the Company for
interest paid on its revolving line of credit. Interest income recorded for the
periods ended December 31, 2002, December 31, 2001 and February 28, 2001 was
$199,000, $256,000 and $415,000, respectively.
Advances made to Sterling of $9.9 million and $9.1 million as of
December 31, 2002 and December 31, 2001, respectively, are classified as a
component of stockholders' deficiency.
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
December 31, 2002 December 31, 2001
----------------- -----------------
Leasehold improvements.................................................... $ 403 $ 359
Office furniture, warehouse equipment and vehicles........................ 1,013 956
------------ -----------
1,416 1,315
Less accumulated depreciation............................................. (1,088) (988)
------------ -----------
$ 328 $ 327
============ ===========
Warehouse equipment financed under capital leases amounted to $268,000
and $232,500 for fiscal 2002 and fiscal 2001, respectively. Accumulated
depreciation related to such equipment was $190,720 and $158,985 at December 31,
2002 and December 31, 2001, respectively.
36
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
December 31, 2002 December 31, 2001
----------------- -----------------
Revolving Credit Agreement due in May 2004 ..................................... $2,617 $2,535
Subordinated promissory note due December 2004 ................................. 500 500
Capital lease obligations for computer and warehouse equipment, due
monthly through December 2005 .................................................. 107 123
Subordinated loan for leasehold improvements, due monthly through October
2003 ........................................................................... 18 39
Other .......................................................................... 9 21
------ ------
3,251 3,218
Less current portion ........................................................... 77 83
------ ------
$3,174 $3,135
====== ======
In July 2001, the Company replaced its existing line of credit with
financing from an institutional lender (the "Revolver"). The Revolver was for a
term of two years in the amount of $4.5 million, subject to a borrowing base.
The Revolver initially carried an interest rate equal to prime plus 1%. Due to
concerns stemming from the bankruptcy filing of Ames in August 2001, the
Revolver was amended to shorten the term of the line and increase the interest
rate to the prime rate plus 1.5%. Upon satisfaction to the lender of SCPI's
ability to obtain new customers and maintain sales and profitability levels, the
Revolver was again amended in December 2001 to provide for a line of $5.0
million, subject to a borrowing base, and to extend the term to May 31, 2003. In
fiscal 2002, further amendments to the Revolver were made to extend the maturity
date to May 31, 2004 and to remove one restriction on the calculation of the
borrowing base. At December 31, 2002, the outstanding balance on the Revolver
was $2.6 million. The rate of interest on the Revolver at December 31, 2002 was
the prime rate plus 1.5% (effective rate of 5.75%). The Revolver is secured by
the assets of SCPI and is subject to the maintenance of certain financial
covenants. At December 31, 2002, the Company was in compliance with its
financial covenants.
At December 31, 2002, the borrowing base under the Revolver was
approximately $2.8 million. During fiscal 2002, the borrowing base ranged from
$2.0 million to $3.8 million, and averaged approximately $3.3 million.
In conjunction with the December 2001 amendment to the SCPI Revolver
and to improve the Company's working capital position through the purchase of
additional inventory, Sterling advanced SCPI $500,000 under a subordinated
promissory note (the "Subordinated Sterling Note"). The Subordinated Sterling
Note, which is subordinate to the SCPI Revolver, matures in a single installment
in December 2004, and bears interest at 12% per annum, payable monthly.
Long-term obligations mature during each fiscal year as follows (in
thousands):
Fiscal
------
2003 ................................. $ 77
2004 ................................. 3,139
2005 ................................. 21
2006 ................................. 8
2007 ................................. 6
------
Total ................................ $3,251
======
6. FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, which
include accounts receivable, accounts payable, the Revolver, the Subordinated
Sterling Note, capital lease obligations and the Subordinated Loan approximate
their fair value at December 31, 2002 and December 31, 2001.
37
7. INCOME TAXES AND DEFERRED TAX ASSET
At December 31, 2002, SCPI and Sterling had aggregate net operating tax
loss carry-forwards (the "Tax Benefits") of approximately $110 million, which
expire in the tax years 2002 through 2021, which will shelter most of SCPI's
income from federal income taxes. A change in control of SCPI or Sterling
exceeding 50% in any three-year period may lead to the loss of the majority of
the Tax Benefits. In order to reduce the likelihood of such a change of control
occurring, SCPI's and Sterling's Certificates of Incorporation include
restrictions on the registration of transfers of stock resulting in, or
increasing, individual holdings exceeding 4.5% of each company's common stock.
Under SFAS No. 109, SCPI records as an asset the tax effect of its net
operating tax loss carry-forwards and other tax benefits, reduced by a valuation
allowance which reduces the net asset to the amount management believes more
likely than not will be realized.
Changes in business conditions and operating trends warrant periodic
management reviews of the recorded valuation allowance to determine if an
increase or decrease in such allowance would be appropriate.
If future profit levels exceed current expectations, and economic or
business changes warrant upward revisions in the estimate of the realizable
value of net operating tax loss carry-forwards, the consequent reduction in the
valuation allowance would result in a corresponding deferred tax benefit in
future results of operations to the extent of the net cumulative aggregate
charges of $2.5 million to deferred tax expense through fiscal 2002, and any
benefit in excess of such charge would be reflected as an addition to paid-in
capital. The accounting treatment to increase paid-in capital results from
SCPI's quasi-reorganization accounting in fiscal 1990.
In December 2001, management determined that it was more likely than
not that the Company will continue to operate profitably. Previously, the
consolidated group that includes SCPI and Sterling was not profitable and
therefore the ability to utilize the net operating loss carryforwards was
restricted. It is expected that the consolidated tax return of the group will
show substantial taxable income. Therefore, management determined that the
future operations of SCPI warranted a decrease in the valuation allowance so
that SCPI recorded a net deferred tax asset of $800,000 in the transitional
period ended December 31, 2001. In fiscal 2002 the Company re-evaluated its
deferred tax asset, resulting in a provision of $73,000 in fiscal 2002 with a
net asset of $727,000.
Income tax expense consists of the following (in thousands):
Fiscal Year Ended
December 31, 2002 December 31, 2001 February 28, 2001
----------------- ----------------- -----------------
Current tax expense $ 272 $ 14 $ 225
Decrease (increase) in deferred tax asset 73 (800)
Current tax benefit from utilization of net
operating tax loss carry-forwards (258) -- (198)
------ ------ ------
Income tax expense (benefit) $ 87 $ (786) $ 27
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2002 and December 31, 2001 are as follows (in thousands):
December 31, 2002 December 31, 2001
----------------- -----------------
Deferred tax assets:
Compensation $ -- $ 50
Allowance for doubtful accounts 286 200
Other (21) 37
38
Net operating loss carryforward* 45,982 46,240
-------- --------
Total deferred tax assets $ 46,247 $ 46,527
Deferred tax asset valuation allowance (45,520) (45,727)
-------- --------
Total net deferred tax asset $ 727 $ 800
======== ========
*Represents net operating loss carryforwards prior to 1991 at the
federal statutory rate. Because tax returns are filed on a consolidated basis
with Sterling, management has not attempted to distinguish net operating loss
carryforwards attributable only to the Company since 1991.
The income tax provision differs from the amount computed using the
statutory federal income tax rate of 34% applied to net income before taxes for
the following reasons (in thousands):
Fiscal Year Ended
December 31, December 31, February 28,
------------ ------------ ------------
2002 2001 2001
---- ---- ----
Tax (benefit) expense based on the U.S. federal
statutory rate $171 $ (65) $198
State income tax expense net of refunds and federal
benefit 14 14 22
Additional tax benefit recognized from utilization
of net operating loss carryforward (88) (732) (198)
Other (10) (3) 5
---- ----- ----
Income tax expense (benefit) $ 87 $(786) $ 27
==== ===== ====
SCPI's and Sterling's aggregate net operating tax loss carry-forwards
for federal income tax purposes at December 31, 2002 expire in tax years as
follows (in thousands):
December
--------
2003 $ 22,000
2004 49,000
2005 13,000
2010 2,000
2011 2,000
2017 3,000
2018 1,000
Thereafter 18,000
--------
$110,000
========
8. STOCK OPTIONS
In fiscal 1992, the Board of Directors granted options to purchase
215,987 shares of the Company's common stock to key employees and to members of
the Board of Directors. The exercise price of the options, which was equal to
the market value of the stock at the date of the grant, was $0.625. The options
vested over four years from issuance. In fiscal 1996, 89,789 options expired.
All options were fully vested and exercisable through January 2002 when they
expired. Stock options outstanding at December 31, 2001 were 126,198.
In recent years, stock-based compensation in the form of options
granted to employees of SCPI were options to purchase stock of SCPI's parent,
Sterling. No stock-based employee compensation cost is reflected in net income,
as all options granted under the Sterling stock option plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. Most Sterling options granted to SCPI employees vest over a four-year
period and expire 10 years after the grant date.
For purposes of pro forma disclosures, the estimated fair value of the
stock options is amortized to expense over the vesting period of the options.
The fair value of these stock options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:
39
Fiscal 2002 Fiscal 2001 Fiscal 2000
----------- ----------- -----------
Risk free interest rate 4.00% 4.50% 6.00%
Expected volatility 79.0% 35.1% 79.0%
Expected life of option 10.0 years 10.00 years 10.00 years
Expected dividends None None None
A summary of Sterling's options granted to employees of SCPI as of
December 31, 2002, December 31, 2001 and February 28, 2001, and changes during
the years then ended is presented below:
Fiscal 2002 Fiscal 2001 Fiscal 2000
Shares Price range Shares Price range Shares Price range
------ ----------- ------ ----------- ------ -----------
Outstanding, beginning of year 182,957 $ 0.88-$3.38 188,057 $ 0.88-$3.38 188,057 $0.88-$3.38
Granted 10,000 $ 1.50 -- -- -- --
Exercised -- -- -- -- -- --
Forfeited/expired (29,157) $ 2.00 (5,100) $ 1.00-$3.38 -- --
Outstanding, end of year 163,800 $ 0.88-$3.38 182,957 $ 0.88-$3.38 188,087 $0.88-$3.38
Exercisable at year end 156,300 $ 0.88-$3.38 172,832 $ 0.88-$3.38 164,807 $0.88-$3.38
The following information applies to Sterling options granted to SCPI
employees at December 31, 2002:
Options outstanding Options exercisable
Weighted average Weighted average Weighted average
Range of exercise price Number of remaining contractual life exercise price per Number of exercise price per
per share shares (years) share shares share
$0.88 - $3.88 113,300 2.99 $1.07 113,300 $1.12
$0.50 - $1.50 50,500 7.13 $0.34 43,000 $0.28
------- ------- -----
163,800 $1.41 156,300 $1.41
======= ======= =====
9. EMPLOYEE PENSION PLAN
Steel City Products maintains a profit-sharing plan ("the Plan")
covering substantially all of its employees, whereby employees may contribute a
percentage of compensation, limited to maximum allowed amounts under the
Internal Revenue Code. The Plan provides for discretionary employer
contributions, the level of which, if any, is to be determined annually by each
company's Board of Directors. There were no discretionary contributions made by
the Company for the fiscal years ended December 31, 2002, December 31, 2001 or
February 28, 2001.
10. OPERATING LEASES
In December 1997, the Company entered into an operating lease for its
McKeesport, PA warehouse with an initial term through January 1, 2003, with one
five-year renewal option. The Company exercised the renewal option in late 2002.
The lease requires minimum rental payments of $247,000 per annum through
December 2005, increasing to $259,000 through December 2007, and payment by the
Company of certain expenses such as liability insurance, maintenance and other
operating costs. With the addition of lawn and garden business in fiscal 2000,
the Company entered into a lease agreement for additional warehouse and office
space in Glassport, PA with an initial term of seven years, expiring December
2007, with one three-year renewal option.
Minimum annual rentals for all operating leases having initial
non-cancelable lease terms in excess of one year are as follows (in thousands):
Fiscal
2003............................................. $ 407
2004............................................. 418
2005............................................. 428
2006............................................. 452
2007............................................. 452
Thereafter....................................... 0
-------
Total future minimum rental payments $ 2,157
=======
40
Total rent expense for the fiscal years ended December 31, 2002,
December 31, 2001 and February 28, 2001 was approximately $389,000, $313,000 and
$268,000, respectively.
11. SEGMENT INFORMATION
The Company's historical business has been the distribution of
automotive related accessories. The distribution of pet supplies was added as a
product line in fiscal 1995, and in fiscal 2000 the Company began to distribute
lawn and garden products. The Company therefore operates in three operating
segments: automotive products, ("Auto"), non-food pet products, ("Pet") and lawn
and garden products ("Lawn"). Terrance Allan, SCPI's President and Chief
Executive Officer, and Maarten Hemsley, its Chief Financial Officer, review the
operating profitability of each segment and its working capital needs to
allocate financial resources. The non-food pet operating segment assets and the
lawn and garden segment assets consists solely of their inventories.
FISCAL YEAR ENDED 12/31/02
Segments Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Net sales $ 15,306 $ 4,784 $ 2,480 $ 22,570
======== ======= ======= ========
Operating profit (loss) $ 312 $ 838 $ 95 $ (663) 582
Interest income 199 199
Interest expense (17) (259) (276)
--------
Income before taxes 505
Current income taxes (14)
Deferred tax expense (73)
--------
Net income $ 418
========
Depreciation and amortization $ 100 $ 49 $ 149
Segment assets $ 4,780 $ 430 $ 727 $ 969 $ 6,906
Capital expenditures $ 101 $ 101
FISCAL YEAR ENDED 12/31/01 (TEN MONTHS)
Segments Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Net sales $ 13,645 $ 2,986 $ 836 $ 17,467
======== ======= ======= ========
Operating profit $ (21) $ 471 $ (55) $ (567) (172)
Interest income 255 255
Interest expense (15) (260) (275)
--------
Loss before taxes (192)
Current income taxes (14)
Deferred tax benefit 800 800
--------
Net income $ 594
========
Depreciation and amortization $ 87 $ 33 $ 120
Segment assets $ 5,040 $ 461 $ 433 $ 1,200 $ 7,134
Capital expenditures $ 29 $ 29
FISCAL YEAR ENDED 2/28/01
Segments Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Net sales $ 17,653 $ 2,642 $ 399 $ 20,694
======== ======= ======= ========
Operating profit $ 619 $ 355 $ 44 $ (420) 598
Interest income 416 416
Interest expense (17) (416) (433)
--------
Income before taxes 581
Income taxes 27
--------
41
FISCAL YEAR ENDED 2/28/01
Segments Auto Pet Lawn Corporate Total
---- --- ---- --------- -----
Net income $ 554
========
Depreciation and amortization $ 118 $ 26 $ 144
Segment assets $ 6,516 $ 307 $ 467 $ 148 $ 7,438
Capital expenditures $ 126 $ 126
12. MAJOR CUSTOMERS
Sales to major customers representing individually more than 10% of
sales during any of the latest fiscal years were as follows (in thousands):
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
December 31, 2002 December 31, 2001 February 28, 2001
----------------- ----------------- -----------------
(ten months)
Sales % of Sales Sales % of Sales Sales % of Sales
Warehouse Sales $ 3,711 16% $ 2,193 13% * *
Kroger $ 3,591 16% $ 2,758 16% $ 2,057 10%
Ames $ 2,918 13% $ 3,217 18% $ 3,746 18%
Giant Eagle $ 2,399 11% $ 2,313 13% $ 2,055 10%
American Sales * * $ 1,863 11% * *
*did not represent more than 10% of sales
In August 2001, Ames filed for Chapter 11 protection. SCPI continued to
ship to Ames as debtor-in-possession under strict payment terms. Pre-petition
sales to Ames during fiscal 2001 (mostly of automotive products) totaled $1.5
million, of which approximately $680,000 was unpaid at the time of Ames
bankruptcy filing. Sales to Ames in fiscal 2002 prior to its liquidation in
July, aggregated $2.9 million, with the increase primarily attributable to sales
of pet supplies.
13. RELATED PARTY TRANSACTIONS
In June 1995, SCPI engaged Oakhurst Management Corporation ("OMC"), a
wholly-owned subsidiary of Sterling, to provide certain legal, management,
investor relations, accounting, and tax services. SCPI's results for the fiscal
years ended 2002, 2001 and 2000 include charges of approximately $457,000,
$398,000 and $475,000, respectively, for these services. Management believes
that the fees charged by OMC are reasonable for the services provided although
objective data regarding fees that would be charged by an unaffiliated entity
are not available. Fees are charged to the Company for actual services and
expenses rendered.
14. PREFERRED STOCK DIVIDENDS
Through December 31, 2002, the Company had not declared or paid Series
A Preferred Stock dividends totaling approximately $7.9 million, for the period
from August 1994. Any such dividends would be payable to Sterling. Dividends
declared and paid in earlier years were used by Sterling in reduction of
intercompany debt owed by Sterling to the Company. Accordingly, if such
dividends were declared and paid by the Company, the effect would be a decrease
in the intercompany loans owed by Sterling to the Company to approximately $2.0
million.
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(Dollar amounts in thousands, except per share data)
Fiscal 2002 quarter ended March 31 June 30 September 30 December 31 Total
Sales $ 6,547 $ 6,858 $ 5,062 $ 4,103 $ 22,570
Gross profit 1,048 1,158 770 677 3,653
42
Net income/(loss) 244 221 (81) 34 418
Preferred stock dividends 253 253 252 256 1,014
Net (loss) income attributable to common
stockholders $ (9) $ (32) $ (333) $ (222) $ (596)
Net (loss) income per share
attributable to common stockholders $ -- $ (0.01) $ (0.10) $ (0.07) $ (0.18)
Fiscal 2001 quarter ended May 31 August 31 November 30* December 31* Total
Sales $ 5,719 $ 5,263 $ 5,264 $ 1,221 $ 17,467
Gross profit 783 889 791 139 2,602
Net income/(loss) 25 (204) 37 736 594
Preferred stock dividends 255 255 255 85 850
Net income/(loss) attributable to common
stockholders $ (230) $ (459) $ (218) $ 651 $ (256)
Net loss per share
attributable to common stockholders $ (0.07) $ (0.14) $ (0.07) $ 0.20 $ (0.08)
*In November 2001, the Board of Directors elected to change the Company's fiscal
year end from the last day of February to December 31. There was no separately
reported third quarter. Results for December include only one month. In December
2001, the Company recorded a credit to the deferred tax asset valuation
allowance of $800,000.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
STEEL CITY PRODUCTS, INC.
Dated: March 25, 2003 By: /s/ Terrance W. Allan
--------------------------------------
Terrance W. Allan, Chief Executive Officer
(duly authorized officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURES TITLES DATE
/s/ Bernard H. Frank Chairman of the Board March 25, 2003
- --------------------------------- Director
Bernard H. Frank
/s/ Maarten D. Hemsley Chief Financial Officer March 25, 2003
- --------------------------------- (principal financial and
Maarten D. Hemsley accounting officer)
Director
/s/ Terrance W. Allan Chief Executive Officer, March 25, 2003
- --------------------------------- President
Terrance W. Allan Director
/s/ John D. Abernathy Director March 25, 2003
- ---------------------------------
John D. Abernathy
/s/ Joseph P. Harper, Sr. Director March 25, 2003
- ---------------------------------
Joseph P. Harper, Sr.
44
Section 302 Certifications for the Signatures
CERTIFICATION FOR ANNUAL REPORT ON FORM 10-K
I, Terrance W. Allan, certify that:
1. I have reviewed this annual report on Form 10-K of Steel City
Products, Inc.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for the periods presented in this annual report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the
"Evaluation Date"), and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's Board of Directors (or persons performing the
equivalent function);
a. All significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: March 25, 2003
By: /s/ Terrance W. Allan
----------------------------------
Chief Executive Officer
45
CERTIFICATION FOR ANNUAL REPORT ON FORM 10-K
I, Maarten D. Hemsley, certify that
1. I have reviewed this annual report on Form 10-K of Steel City
Products, Inc.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for the periods presented in this annual report;
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this annual
report is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the
"Evaluation Date"), and
c. Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation date;
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's Board of Directors (or persons performing the
equivalent function);
a. All significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: March 25, 2003
By: /s/ Maarten D. Hemsley
-------------------------------
Chief Financial Officer
46
SCHEDULE II
STEEL CITY PRODUCTS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
Column A Column B Column C Column D Column E
Balance at Charges to other
beginning of Charged to costs accounts - Deductions - Balance at end
Description period and expenses describe describe(A) of period
Allowance for doubtful accounts deducted from trade
accounts receivable:
Years ended:
December 31, 2002 $ 588 259 - 6 $ 841
December 31, 2001 $ 191 483 - 86 $ 588
February 28, 2001 $ 230 30 - 69 $ 191
(A) Amounts were deemed uncollectible
47
INDEX TO EXHIBITS
Exhibit No. Description
3.1 Restated Certificate of Incorporation (filed as Exhibit 3(a)
to the Company's Annual Report on Form 10-K for the fiscal
year ended February 27, 1993).
3.2 By-laws of the Company as amended through May 17, 1993 (filed
as Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended February 26, 1994).
#10.1 Employment Agreement with Bernard H. Frank dated as of April
1, 1998 (filed as Exhibit 10.1 to the Company's Annual Report
on Form 10-K for the fiscal year ended February 28, 1999).
#10.2 Employment Agreement with Terrance W. Allan dated as of
September 1, 1993 (filed as Exhibit 10.3 to the Company's
Annual Report of Form 10-K for the fiscal year ended February
26, 1994).
Exhibit No. Description
#10.4 Form of Option Agreement dated August 29, 1991 with directors
and executive officers (filed as Exhibit 10(t) to the
Company's Annual report on Form 10-K for the fiscal year ended
February 29, 1992).
10.5 Note Agreements with William T. Apgar, Liquidating Trustee for
the Retail Acquisition Corp. Amended Plan of Reorganization,
(filed as Exhibit 10(w) the Company's Annual Report on Form
10-K for the fiscal year ended February 27, 1993).
10.6 Trademark & Trade Name License Agreement between Oakhurst
Holdings, Inc. and Steel City Products, Inc., dated August 16,
1995, (filed as exhibit #10.12 to the Company's Annual Report
on Form 10-K for the fiscal year ended February 29, 1996).
10.7 Corporate Services Agreement between Steel City Products, Inc.
and Oakhurst Management Corporation dated June 1, 1995, (filed
as exhibit #10.13 to the Company's Annual Report on Form 10-K
for the fiscal year ended February 29, 1996).
10.8 Lease agreement by and between Regional Industrial Development
Corporation of Southwestern Pennsylvania and Steel City
Products, Inc., dated November 11, 1997- (filed as exhibit #10
to the Company's Form 10-K for the year ended February 28,
1998)
10.9 Lease agreement by and between SPEDD, Inc. and Steel City
Products, Inc. dated November 21. 2000. (filed as exhibit 10.9
to the Company's Form 10-K for the year ended February 28,
2001)
10.10 Employment Agreement with Terrance W. Allan dated as of May 1,
2000. (filed as exhibit 10.10 to the Company's Form 10-K for
the year ended February 28, 2001)
10.11 Revolving Credit Agreement dated July 13, 2001 between
National City Bank of Pennsylvania and Steel City Products,
Inc. (filed as exhibit 10.1 to the Company's Form 10-Q for the
quarter ended May 31, 2001)
10.12 Amendment to the Revolving Credit Agreement dated September
12, 2001 between National City Bank of Pennsylvania and Steel
City Products, Inc. (filed as exhibit 10.1 to the Company's
Form 10-Q for the quarter ended August 31, 2001)
10.13 Second Amendment to the Revolving Credit Agreement between
National City Bank of Pennsylvania and Steel City Products,
Inc. dated December 12, 2001. (filed as exhibit 10.13 to the
Company's Form 10-K for the Transition Period ended December
31, 2001)
10.14 Third Amendment to the Revolving Credit Agreement between
National City Bank of Pennsylvania and Steel City Products,
Inc. dated June 27, 2002 (filed as Exhibit 10.2 to the
Company's Form 10-Q for the quarter ended June 30, 2002).
10.15 Fourth Amendment to the Revolving Credit Agreement between
National City Bank of Pennsylvania and Steel City Products,
Inc. dated September 25, 2002 (filed as Exhibit 10.3 to the
Company's Form 10-Q for the quarter ended September 30, 2002).
*10.16 Fifth Amendment to the Revolving Credit Agreement between
National City Bank of Pennsylvania and Steel City Products,
Inc. dated November 30, 2002.
21 Subsidiaries at December 31, 2002:
Oakhurst Holdings, Incorporated - Delaware
*99.1 Certifications of Chief Executive Officer and Chief Financial
Officer
- -----------------
#Management contract or compensatory plan or arrangement.
*Filed herewith
(b) Reports on Form 8-K:
None